Skip to main content

Rental of a Church Parsonage to a Non-minister

Question:

A church owns a parsonage, but the pastor does not use it as he own his own home. The church rents the parsonage to a tenant other than a minister or employee of the church. Will the church be responsible for paying income tax on these monies as Unrelated Business Income (filing a Form 990-T) even if the money is used to carry on the business of the church?

Answer:

Whether the money is used for church purposes is irrelevant. IRS Publication 598 states:

"If an exempt organization regularly carries on a trade or business not substantially related to its exempt purpose, except that it provides funds to carry out that purpose, the organization is subject to tax on its income from that unrelated trade or business."

Fortunately, in the case of rental income from real property, such income is "excluded in computing unrelated business taxable income" (Publication 598 (rev. March 2012), Chapter 4).

However, a second concern not addressed in the question must be raised: Will the parsonage lose its status as excluded from the real estate tax rolls of the local government? I have worked with two churches in similar situations in two different states. My recommendation has been to communicate openly with the local authorities (typically an Assessor) as to the church's intentions. In both cases, because the use was temporary (in one case) and rented to a missionary of the church during his furlough (in the other case) the Assessor did not believe its use violated the statutory exclusion from real estate taxes for church property.

Comments

Popular posts from this blog

Mission Trips Involving Both Charitable and Personal Time

Question:

A church group went on a two-week mission trip, and a few of the members stayed an additional two weeks for personal time. Will the members who stayed the two additional weeks be able to deduct expenses from the trip?

Answer:

IRS Pub 526 covers the topic of Charitable Contributions and, more specifically, travel expenses associated with charitable trips. The publication states that travel expenses will be deductible “if there is no significant element of personal pleasure, recreation, or vacation in the travel.” The publication also states, “The deduction for travel expenses won't be denied simply because you enjoy providing services to the charitable organization. Even if you enjoy the trip, you can take a charitable contribution deduction for your travel expenses if you are on duty in a genuine and substantial sense throughout the trip. However, if you have only nominal duties, or if for significant parts of the trip you don't have any duties, you can't deduct you…

Supporting a Retired Pastor

Question:

Can a church provide monthly support to a pastor who is no longer actively in the ministry without jeopardizing its tax-exempt status? If so, should a Form-1099 MISC be issued? 
Answer:
First, this action would not jeopardize tax-exemption status. The action of supporting a retired minister is within the boundaries of exempt purposes. 
Second, the post retirement support is compensation. The compensation should be reported on a Form 1099-MISC unless he is still considered to be an employee who should therefore receive Form W-2.


This is the "bad news." However, let's revisit a blog post we provided in 2009.

http://ministrycpa.blogspot.com/2009/10/retired-minister-continued-support-from.html

"A retired minister may receive part of his or her pension benefits as a designated parsonage allowance based on past services. Trustees of a minister’s retirement plan may designate a portion of each pension distribution as a parsonage allowance excludible under IRC § 107. (Re…

Housing Allowance when Bartering for Rent Payments

Question:

If a minister rents his principal residence, but he performs services (mowing the lawn, repairing the roof, etc.) in lieu of rent, can he still qualify the rent amount for a housing allowance tax benefit?

Answer:

Of course, bartering income is taxable. The Internal Revenue Code interprets that above situation as follows: tenant/minister receives taxable income for the fair market value of the services he provides, andtenant/minster pays landlord for renal of residence. The minister in this case reports taxable income for services provided in lieu of rent. It is also likely subject to self-employment tax. He may then claim as qualifying housing allowance expense equal to the amount he "pays" for rent of his personal residence. Essentially, there is no difference than if the minister and his landlord simply traded checks.

See a past MinistryCPA post regarding this topic: http://ministrycpa.blogspot.com/2016/09/services-to-church-in-lieu-of-rent-of.html