When calculating the Housing Allowance (and how much you get to exclude from income tax), it is necessary to calculate the fair rental value of your home.
But how do you do that?
Unlike your designated housing allowance or your housing expenses, IRS does not give us a quick and easy calculation to determine the fair rental value of a property. It is a “fuzzy” number with no one correct answer, based entirely on the facts and circumstances of the real estate market. In other words, we have to estimate it on our own.
If you rent your home, the amount you pay for rent is usually a good indicator of fair rental value. You also need to demonstrate that the value you pay is comparable to other, similar properties in the area (to show that you aren’t paying too much or too little). Craigslist, newspaper ads or realtor websites are good sources of information to reference.
If you own your home, you will not have a monthly rental value to reference, so you will have to rely on researching rent for similar properties in the area. Again, the point is being able to show an IRS auditor what annual rent is normally in that area for a property of that size and quality.
You also get to include the minimum cost it would take to furnish the property when calculating the fair rental value. You could use actual costs if you purchased furniture recently or you consult a local furniture rental company for information.
Clergy Financial Resources helps to calculate your fair rental value when completing your 1040 tax return. Visit our website at https://www.clergyfinancial.com/services/clergy-tax-preparation/ for details.
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Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.
This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.
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