In 1971, the IRS issued a Revenue Ruling which imposed the third factor upon clergy who own their own home: the amount excluded from gross income cannot exceed the fair rental value of the housing. This rule was added to Code section 107(2} itself in 2002. According to the above-referenced Revenue Ruling and current
publications issued by the IRS, the “fair rental value” of a clergyperson’s housing includes, in addition to the fair rental value of the housing (with furnishings}, the fair rental value of appurtenances such as a garage and the cost of utilities.
The fair rental value of a clergyperson’s housing would likely become an issue only in the event of an IRS audit.
In determining the amount of the exclusion, however, the clergyperson should make a bona fide, even if informal,
calculation so that, if ever challenged, he or she would be able to substantiate the amount of the exclusion. If the clergyperson actually rents the house, the amount of the rent would be persuasive evidence as to the fair rental value (unless there is some family connection or the clergyperson is otherwise paying a non-market rate}.
Sometimes a clergyperson will have rented the house to others before retirement and thus will have a good idea of the actual rent that the house could command. There are other, equally obvious methods of calculating a fair rental value: an appraisal from a local realtor, examination of listings with local realtors, verification of actual rents paid for any comparable housing in the neighborhood or community (as adjusted for special advantages or disadvantages
of the specific property} or a survey of newspaper ads of houses for rent in the community
One aspect of the housing allowance issue is often misunderstood:
The amount that may be excluded is the least of:
a) the amount designated as the housing allowance exclusion,
b) the amount actually expended by the clergyperson for housing, or
c) the fair rental value of the residential property occupied by the clergyperson.
For example, if you designate 100% of the pension as a housing allowance and the clergyperson receives $6,000 in pension, but spends only $5,000 on housing which has a fair rental value of $8,000, the amount that may be excluded may not exceed $5,000.
Rev. Rul. 71-280.
Rev. Rul. 71-280, IRS Publication 17, IRS Publication 525
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