By Richard R. Hammar, J.D., LL.M., CPA
© Copyright 1990, 1998 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m27 m96 c0190
How much of a minister's compensation can a
church designate as a housing allowance? That was the issue
presented to the IRS in a private letter ruling request. The IRS,
relying on a ruling it issued in 1971, concluded that a minister's
housing allowance exclusion may never exceed the fair rental value
of his or her home (furnished, including utilities), regardless of
how much of the minister's compensation the employing church has
designated as a housing allowance. Rev. Rul. 71-280. That is, a
church can declare any portion of a minister's compensation as a
housing allowance, but this will be "ineffectual" since the amount
of the allowance that is excludable may never exceed the fair
rental value of the home (furnished, including utilities). In
explaining this "ceiling," the IRS observed that "Congress only
intended to grant an exclusion to an amount received in lieu of a
home in kind." In other words, a minister who receives a housing
allowance should be no better off than a minister who is provided
an identical home as a rent-free parsonage. Since the minister
living in a parsonage cannot exclude more than the fair rental
value of the parsonage, a minister who owns a home should not be
placed in a "better position" by being given a housing allowance in
excess of the fair rental value of the home. While this logic is
questionable, it clearly represents the IRS official position. Of
course, the amount of a minister's housing allowance that can be
excluded from gross income (for income tax purposes) can never
exceed actual expenses incurred in acquiring or maintaining the
home. Accordingly, the actual amount that can be excluded from
gross income is the least of the following three amounts: (1) the
church-designated allowance, (2) actual housing expenses, or (3)
the fair rental value of the home (furnished, including utilities).
There is nothing to be gained by designating a homeowning
minister's entire compensation as a housing allowance, unless such
amount is clearly less than actual housing expenses or the fair
rental value of the home. Private Letter Ruling 8825025.