Skip to main content

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.

Comments

Popular posts from this blog

Housing Allowance and Form 1099-MISC Reporting

Question:

A church provides its minister a housing allowance, but for other purposes it believes that it must report the full amount of compensation (including the non-taxable housing allowance portion) on Form 1099-MISC (in order to demonstrate the full earnings of the minister). If the church reports his compensation,including the housing allowance, on Form 1099-MISC as taxable income, will he be able to deduct his housing expenses somewhere else on the Form 1040?

Answer:

This questions brings up a couple of issues. First, most ministers are properly classified as employees who receive Form W-2, not as independent contractors who receive Form 1099-MISC. On Form W-2, Box 1 for taxable compensation is reduced reflecting the church's designation of a portion of his pay as non-taxable. Then in Box 14, it typically reports as a memorandum item his additional non-taxable, housing allowance compensation. In the situation addressed in the question, this Form W-2 reporting may or may not a…

Review: Form 1099 Payments to 501(c)(3) Organizations

Question:

A church rented space from another church last year. Should it request a completed Form W-9 and issue Form 1099-MISC?

Answer:

We have written similar blog posts on this topic in the past (listed below), but we figured it was a good time for a review. 

Payments from one 501(c)(3) organization to another 501(c)(3) organization are not subject to Form 1099-MISC reporting. The 2015 Instructions for Form 1099-MISC state that "payments to a tax-exempt organization" are exempt from reporting a Form 1099-MISC. 

The following are typical examples of payments of $600 or more by a church which are subject to reporting a Form 1099-MISC:
Rent paid to an individual (non-corporation)Payments for services rendered by individuals who are not employees (e.g. janitorial service, facilities, snow removal, guest speakers)Support sent directly to missionariesHere are some similar blog posts that we have written in the past:

Form 1099 for Payments to Other Ministries
Form 1099 for Non-profit?
Fo…

Gifts Paid Out of Church Funds: Form 1099-MISC Requirements

Question:
 A church gave a wedding gift of $1000 to a couple who are church members. No goods or services were provided by the couple in exchange for the gift.  Is a Form 1099-MISC required? 
Answer: In the following answer, we assume that the couple are not employees of the church from whom the gift could not be viewed as compensation for their services. Also, the amount seems to be small enough to avoid any concerns of "private inurement."

Accordingly, no Form 1099-MISC is required. According to the 2017 IRS Instructions for Form 1099-MISC a Form 1099-MISC is only required for payment of goods or services. The requirements are as follows:
"File Form 1099-MISC, Miscellaneous Income, for each person to whom you have paid during the year:  At least $10 in royalties (see the instructions for box 2) or broker payments in lieu of dividends or tax-exempt interest (see the instructions for box 8);  At least $600 in:  1. Rents (box 1);  2. Services performed by someone who is not your …