What are the Tax Consequences of Living in a Church-Owned Parsonage?

Introduction

This article examines the topic of parsonages (or manses).

Executive Summary

Ministers can exclude from their taxable income the annual rental value of a parsonage provided to them as compensation. once again, the annual rental value of the parsonage is not “deducted” from the minister’s income. Rather, it is not reported as additional income. In addition, ministers who live in a parsonage can exclude from their federal income taxes the portion of their ministerial compensation designated by their church as a “parsonage allowance” or parsonage-related expenses such as utilities, repairs, and furnishings.

Lesson

Based upon research, about 15% of ministers live in a church-provided house. The annual fair rental value of a parsonage is a nontaxable fringe benefit in computing federal income taxes. The annual rental value of the parsonage isn't “deducted” from his minister’s income. Rather, it is simply not reported as income, as it would be by non-minister employees. There are a number of things you should know about parsonages.

(1) minister

The annual rental value of a parsonage is a tax-free fringe benefit (in computing income taxes) only if the parsonage is provided to a “minister of the gospel” as compensation for services performed in the exercise of ministry.

(2) an exclusion

The annual rental value of a church-provided parsonage is an exclusion from gross income, rather than a deduction. Many ministers think that they are not receiving a tax “benefit” unless they can “deduct” it on their tax return.

(3) parsonage allowances

Ministers who live in a church-provided parsonage often incur expenses in "maintaining" the parsonage. Common examples include utilities, repairs, insurance, and furnishings. The portion of a minister’s compensation that is designated in advance by the church as a “parsonage allowance” is nontaxable for income tax reporting purposes to the extent it is used to pay for parsonage-related expenses. The income tax regulations specify that the designation of the allowance may be contained in “an employment contract, in minutes of or in a resolution by a church or other qualified organization or in its budget, or in any other appropriate instrument evidencing such official action.” The regulations further provide that “the designation . . . is a sufficient designation if it permits a payment or a part thereof to be identified as a payment of rental allowance as distinguished from salary or other remuneration.” In other words, the designation must simply distinguish a part of the minister’s compensation as a parsonage allowance.

Many ministers who live in a parsonage are unaware that they do not pay tax on that portion of their salary that is designated in advance by their church as a parsonage allowance. This allowance costs the church nothing, but it provides a minister with a great tax benefit.

(4) social security

The parsonage exclusion and parsonage allowance cannot be excluded in computing a minister’s social security (self-employment) taxes. Therefore, in computing self-employment taxes on Schedule SE (Form 1040) a minister who lives in a church-owned parsonage must include the annual rental value of the parsonage, as well as a parsonage allowance, as income.

What is the annual rental value of a parsonage. The IRS has simply said that "determining the fair rental value [of a parsonage] is a question of all facts and circumstances based on the local market.”