October 30, 2012

Loss of PropertyTax-Exempt Status for Parsonage

Question:

A youth minister and his wife live in the church parsonage where the wife runs a home photography business. Does this business put the church at risk of losing its exempt status?  How can we limit that risk?

Answer:

Perhaps a good place to start is to quickly review the aspects of tax-exempt status. Exempt organizations typically enjoy the following benefits:
  • No federal or state income tax on the excess of receipts over disbursements
  • Donors to these organizations receive tax benefits for their contributions
  • Real property owned by the entities are not subject to real estate taxes
  • Purchases of personal property are exempt from sales tax
  • Employee compensation is not subject to federal or state unemployment taxes
In this case, the minister should not be worried about losing income tax exempt status, but rather property tax exemption. In virtually all states, church facilities, including parsonages, are exempt from local property taxes. Whether the operation of a photography studio within the parsonage threatens this favorable status is a matter of local law and interpretation.

A September 11, 2010, blog post provides some help for this issue.


The posting responded to the following question: [In the situation described] “Will the parsonage lose its status as excluded from the real estate tax rolls of the local government?" We answered:

We recommend taking the same steps in the situation addressed here.

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