Clergy Tax Facts
Clergy Tax Tip:
If you own your home and you receive a housing allowance as part of your pay, the exclusion cannot be more than the smaller of the following:
-The amount actually used to provide a home,
-The amount officially designated (in advance of payment) as a rental or housing allowance,
-The fair market rental value of the home, including furnishings, utilities, garage, etc., or
- An amount which represents reasonable pay for your services as a minister.
How to determine the Fair Rental Value of my residence and furnishings?
In general, the fair rental value of the property is a question of facts and circumstances based on the local real estate market.
Obtain the current fair rental value of your home from a local realtor or someone in the residential rental business who will give you a quote in writing. At a minimum, find and keep comparable rental listings in your neighborhood from the newspaper, Craigslist.com or another independent source of reference. It is important to document your basis for making the determination.
As to the rental value of furnishings, you can add an additional minimal amount to the rental value, or you might consider consulting a local or national furniture rental company for what it would cost to rent appropriate furniture for your home. Again, document your numbers in writing in the event you are audited in the future.
Since clergy housing allowances are excludable only up to the maximum of fair rental value, the determination of what that constitutes is of utmost importance. Figuring the fair rental value of a property would be simple if there were fixed formulas, rules or methods. Usually, there is no single formula that applies when determining fair rental value. The fair rental value usually is figured by examining the facts and circumstances of each instance, but in all cases should be based on a furnished property plus utilities. The fair rental value of a furnished property as a whole should be used, not the fair rental value of a property plus the fair rental value of the furniture.
The courts have allowed two methods for figuring fair rental value. Both assume that fair rental value is determined at arm’s length, that is, objectively and between unrelated parties. The primary method has been comparable fair rental value based on the testimony of an expert who compares the property in question with other similar properties. Real estate agents are able to quote rental values based upon the location, size and condition of the dwelling.
The second valuation method allowed by the courts is the comparable sales method. This technique requires the determination of two amounts: the fair market value of the subject property and the rate of return on investment that an unrelated lessor of comparable property would require. The two numbers are multiplied to determine the fair rental value amount. The first amount, fair market value, should be readily available from real estate sales records. The second figure, the required rate of return, is more subjective. The Tax Court used 13% in the 1999 Hunt & Sons (66 TCM 853) case, but a higher rate of return may be justified. A required rate of 15% probably would not be unreasonable.
Your house has a value of $180,000. Using the comparable sales method of 12%, the fair rental value would be $21,600 per year. However, because rental costs vary considerably from area to area, the rule may not apply to your community.
If you own your home and receive as part of your compensation as housing or rental allowance, you may exclude from gross income the smallest of the following:
- The amount actually used to provided a home,
- The amount officially designated as housing allowance, or
- The fair rental value of the home, including furnishings, utilities, garage, etc.
The tax code contains no specific percentage or dollar limitation as to how much can be designated as housing allowance. In the case of bivocational ministers and supply pastors, a reasonable designation may be up to 100 percent of the cash compensation.
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Clergy should not view this information as a substitute for professional advice. This information is subject to change, due to administrative rulings or interpretations and or technical corrections by the IRS. If legal advice or other expert assistance is required, the services of a competent clergy tax professional person should be sought.