August 04, 2014

Sale of Church Parsonage - How is it Taxed?

Question:

When is the sale of a parsonage taxable to a minister? When is it taxable to the church?

Answer:

We have recently received questions concerning the sale of church property, specifically related to parsonages. This blog post will try and tackle three possible scenarios of selling a parsonage, and how the owner should treat the gain or loss of the sale.

Scenario #1 will assume that the minister (or taxpayer) is 100% owner of the parsonage.
Scenario #2 will assume that the church is 100% owner of the parsonage.
Scenario #3 will assume that the minister is 50% owner and the church is 50% owner of the parsonage.

Scenario #1
If the minister (taxpayer) is the 100% owner of the parsonage at the time of sale, then a number of factors must be analyzed to determine the gain or loss. IRS Publication 523 has complete details on Selling Your Home. In this recent, associated blog posting, we provide a quick overview of how to determine a gain or loss on the sale of a home.

Scenario #2
If the church is the 100% owner of the parsonage at the time of sale, then the gain or loss would be reported by the church, a non-profit organization, on its accrual basis (U.S. GAAP) prepared financial statements. If the church uses the cash or the modified cash basis of accounting, the gain or loss would likely not need to be reported on the financial statements.

From a tax standpoint, as long as the church does not regularly participate in the business of selling property, a gain on the sale of a parsonage would not be taxable. However, if a church frequently sells property and is in the business of selling property to a customer, the church will be subject to UBIT (Unrelated Business Income Tax). Non-profit organizations fall subject to UBIT when sources of revenue do not match the exempt purposes of the church.

To learn more about how a non-profit organization should treat gains or profits, read this blog post that we published a few weeks ago:

"Net Income" Rules for a Non-Profit

Scenario #3
If at the time of sale the minister owns 50% of the parsonage and the church owns 50% of the parsonage, this is considered joint ownership. Careful reconciliation and review of the original purchase documents is required to determine the correct allocation of gain or loss between the minister and church. The minister reports his portion of the gain on his personal tax return (if he does not meet the exception to exclude the gain), and the church reports its portion of the gain or loss similar to what is outlined in Scenario #2.

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