Church Rental of House--Tax Consequences

Question:

Can a church rent a property to use for its church parsonage? If so, can anyone live in the property as long as they're not paying rent to the church for living in the parsonage?

Answer:

According to the IRS’s Minister Audit Technique Guide:

“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. 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.”

The church provides either the parsonage or the rental allowances to cover the cost of housing for the minister.

If an individual other than the minister had his rent paid for by the church, it may be considered compensation for that individual and, if so, would need to be reported as such. Possible scenarios:

•      Church rents house for destitute family as a temporary act of benevolence: non-taxable.
•      Church rents house for non-ministerial employee near the church property as a condition of employment (example: custodial or security personnel): non-taxable
•      Church rents house for minister. Tax consequences: income tax – none; self-employment tax: taxable. Although, the tax consequences would be identical if the church simply gave the minister a cash housing allowance and he paid the rent himself.
•      Church rents house for employee, not a condition for employment – taxable just as if it had been paid directly to the employee in cash.