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Parsonage Rental to Minister at Below Fair Market Value

Question:

A church owns a parsonage on which it makes a monthly $500 mortgage payment. The fair rental value of the property is $800 per month. The church would like to allow its minister to live in the parsonage and pay to the church only the mortgage payment each month because it cannot afford to provide him with additional cash compensation. First, is this a legal arrangement? Second, what are the tax consequences?

Answer:

This arrangement appears to violate no legal requirements that we are aware of. The parsonage allowance will be income-tax free, but the pastor should report the full fair rental value as housing allowance on Form 1040, Schedule SE when filing his personal income taxes.

Additionally, the church should designate at least $500 per month of the pastor's cash compensation as housing allowance since he has at least that much of justifiable housing expenses. He will be responsible to estimate a justifiable fair rental value in excess of his payment for purposes of reporting additional self-employment income on Form 1040, Schedule SE.


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