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Sale of a Parsonage to a Pastor

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Question:

 To show appreciation to its pastor, a church would like to sell him its parsonage for a nominal value. Will this sale at well below fair market value cause any unintended tax consequences?

 Answer:

 Yes, this sale will essentially increase the pastor's income by the difference between the bargain sale price and fair market value of the property, reportable on his W-2 as taxable compensation. A "gift" of this sort made with the best intentions may cause an extremely high tax burden to the pastor, including both income and self-employment taxes. The church could provide the pastor with a cash bonus along with the parsonage sale to help him pay some of the taxes. However, the cash bonus will also be taxable compensation.

 There are ways to minimize the tax effects of a transaction of this nature, but those require careful thought and consideration of the situation of the church and pastor.
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