IRC § 107 provides an exclusion from gross income for a “parsonage allowance,” housing specifically provided as part of the compensation for the services performed as a minister of the gospel. This includes the rental value of a home furnished to him or her as part of compensation or a housing allowance, to the extent that the payment is used to rent or provide a home, and to the extent, such allowance does not exceed the fair rental value (FRV) of the home, including furnishings and appurtenances such as a garage and the cost of utilities. IRC § 107(2). The term “parsonage allowance” includes church provided parsonages, rental allowances with which the minister may rent a home, and housing allowances with which the minister may purchase a home. A minister can receive a parsonage allowance for only one home.
A housing allowance must be included in the minister’s gross income in the taxable year in which it is received to the extent that such allowance is not used by him during the taxable year to rent or otherwise provide a home or exceeds the FRV of the home including furnishings and appurtenances such as a garage and the cost of utilities. Treas. Reg. § 1.107-1(c) and IRC § 107(2).
The value of the “allowed” parsonage allowance is not included in computing the minister’s income subject to income tax and should not be included in W-2 wages. However, the parsonage allowance is subject to self-employment tax along with other earnings. IRC § 402(a)(8). If a church-owned parsonage is provided to the minister, instead of a housing allowance, the fair rental value of the housing must be determined. Determining the fair rental value is a question of all facts and circumstances based on the local market, but the church and minister have often already agreed on a figure and can provide documentary evidence.
The exclusion under IRC § 107 only applies if the employing church designates the amount of the parsonage allowance in advance of the tax year. The designation may appear in the minister’s employment contract, the church minutes, the church budget, or any other document indicating official action. Treas. Reg. § 1.107-1(b). An additional requirement for purposes of IRC § 107 is that the fair rental value of the parsonage or parsonage allowance is not more than the reasonable pay for the ministerial services performed.
The amount of the parsonage allowance excludible from gross income is the LEAST of:
1. The amount actually used to provide a home,
2. The amount officially designated as a housing allowance, or
3. The fair rental value (FRV) of the home, including furnishings and appurtenances such as a garage plus the cost of utilities. IRC § 107(2).
The following examples illustrate the application of these rules. For simplification, assume that mortgage payments include property taxes and insurance.
Example 1
A is an ordained minister. She receives an annual salary of $36,000 and use of a parsonage which has an FRV of $800 a month, including utilities. She has an accountable plan for other business expenses such as travel. A’s gross income for arriving at taxable income for Federal income tax purposes is $36,000, but for self-employment tax purposes it is $45,600 ($36,000 salary + $9,600 FRV of parsonage).
Example 2
B, an ordained minister, is vice president of academic affairs at Holy Bible Seminary. His compensation package includes a salary of $80,000 per year and a $30,000 housing allowance. His housing costs for the year included mortgage payments of $15,000, utilities of $3,000, and $3,600 for home maintenance and new furniture. The fair rental value of the home, as furnished, is $18,000 per year.
The three amounts for comparison are:
a. Actual expenses of $21,600 ($15,000 mortgage payments + $3,000 utilities + $3,600 other costs)
b. Designated housing allowance of $30,000
c. FRV plus utilities of $21,000 ($18,000 + $3,000 utilities)
B may exclude $21,000 from gross income but must include in income the other $9,000 of the housing allowance. The entire $30,000 will be considered in arriving at net self-employment income.
Example 3
C is an ordained minister and has been in his church’s employ for the last 20 years. His salary is $40,000 and his designated parsonage allowance is $15,000. C’s mortgage was paid off last year. During the tax year, he spent $2,000 on utilities, and $3,000 on real estate taxes and insurance. The FRV of his home, as furnished, is $750 a month.
The three amounts for comparison are:
a. Actual housing costs of $5,000 ($2,000 utilities + $3,000 taxes and insurance)
b. Designated housing allowance of $15,000
c. FRV + utilities of $11,000 ($9,000 FRV + $2,000 utilities)
C may only exclude his actual expenses of $5,000 for Federal income tax purposes. He may not exclude the FRV of his home even though he has paid for it in previous years. Swaggart v. Commissioner, T.C. Memo. 1984-409. $15,000 will be included in the computation of net self-employment income.
Example 4
Assume the same facts as in Example 3, except that C takes out a home equity loan and uses the proceeds to pay for his daughter’s college tuition. The payments are $300 per month. Even though he has a loan secured by his home, the money was not used to “provide a home” and can’t be used to compute the excludible portion of the parsonage allowance. The results are the same as for Example 3. The interest on the home equity loan may be deducted as an itemized deduction subject to the limitations, if any, of IRC § 163.
Example 5
D is an ordained minister who received $40,000 in salary plus a designated housing allowance of $12,000. He spent $12,000 on mortgage payments, $2,400 on utilities, and $2,000 on new furniture. The FRV of his home as furnished is $16,000. D’s exclusion is limited to $12,000 even though his actual cost ($16,400) and FRV and utilities ($18,400) are more. He may not deduct his housing costs in excess of the designated allowance.
Example 6
E’s designated housing allowance is $20,000. She and her husband live in one half of a duplex which they own. The other half is rented. Mortgage payments for the duplex are $1,500 per month. E’s utilities run $1,800 per year, and her tenant pays his own from a separate meter. During the year E replaced carpeting throughout the structure at a cost of $6,500 and did minor repairs of $500. E must allocate her mortgage costs, carpeting, and repairs between her own unit and the rental unit in determining the amount of the excludible parsonage allowance. Amounts allocable to the rented portion for mortgage interest, taxes, etc., would be reported on Schedule E as usual. Her actual costs to provide a home were $14,300 ($9,000 mortgage payments, $1,800 utilities, and $3,500 for half the carpeting and repairs). The FRV for her unit is the same as the rent she charges for the other half, which is $750 a month, and she estimates that her furnishings add another $150 per month to the FRV. Her FRV plus utilities is $12,600 ($10,800 FRV + $1,800 utilities). E may exclude $12,600 for Federal income tax purposes.
Pursuant to IRC § 265(a)(6) and Rev. Rul. 87-32, 1987-1 C.B. 131 even though a minister’s home mortgage interest and real estate taxes have been paid with money excluded from income as a housing allowance, he or she may still claim itemized deductions for these items. The sale of the residence is treated the same as that of other taxpayers, even though it may have been completely purchased with funds excluded under IRC § 107.
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