Skip to main content

Renting a Church Parsonage: Threat to Tax Exempt Status

Question:

A church renting its parsonage to a non-staff member:
1.) Must a special account be established for funds received from rental of a church parsonage?
2.) Can these funds be used for church expenses not related to the property without affecting the church's tax-exempt status?

Answer:

We will address some significant concerns with the actions of the church; but first, in order to answer the questions above, the subject of Unrelated Business Income Tax (UBIT) must be consideredAccording to IRS Publication 598, "Rents from real property ... are excluded in computing unrelated business taxable income." The IRS cites exceptions to this rule. One exception is if the rental is debt-financed, the organization may owe UBIT. 

Now to answer the questions submitted:

1.) The church does not need to establish a separate account. It will not owe UBIT unless specialized debt-financing is employed which is beyond the scope of this blog post.  
2.) The church tax-exempt status will not affected by the use of the rental income for expenses not related to the property. HOWEVER, the church may lose its real estate tax exemption for the property because it is not used for a exempt purpose. We recommend the church contact the local tax assessor to determine whether temporary housing of non-church staff may avoid reclassification of the exempt status of the property.


See a past blog post for more information:
http://ministrycpa.blogspot.com/2012/11/church-renting-building-unrelated.html

Comments

Popular posts from this blog

Housing Allowance when Bartering for Rent Payments

Question:

If a minister rents his principal residence, but he performs services (mowing the lawn, repairing the roof, etc.) in lieu of rent, can he still qualify the rent amount for a housing allowance tax benefit?

Answer:

Of course, bartering income is taxable. The Internal Revenue Code interprets that above situation as follows: tenant/minister receives taxable income for the fair market value of the services he provides, andtenant/minster pays landlord for renal of residence. The minister in this case reports taxable income for services provided in lieu of rent. It is also likely subject to self-employment tax. He may then claim as qualifying housing allowance expense equal to the amount he "pays" for rent of his personal residence. Essentially, there is no difference than if the minister and his landlord simply traded checks.

See a past MinistryCPA post regarding this topic: http://ministrycpa.blogspot.com/2016/09/services-to-church-in-lieu-of-rent-of.html

Mission Trips Involving Both Charitable and Personal Time

Question:

A church group went on a two-week mission trip, and a few of the members stayed an additional two weeks for personal time. Will the members who stayed the two additional weeks be able to deduct expenses from the trip?

Answer:

IRS Pub 526 covers the topic of Charitable Contributions and, more specifically, travel expenses associated with charitable trips. The publication states that travel expenses will be deductible “if there is no significant element of personal pleasure, recreation, or vacation in the travel.” The publication also states, “The deduction for travel expenses won't be denied simply because you enjoy providing services to the charitable organization. Even if you enjoy the trip, you can take a charitable contribution deduction for your travel expenses if you are on duty in a genuine and substantial sense throughout the trip. However, if you have only nominal duties, or if for significant parts of the trip you don't have any duties, you can't deduct you…

403(b) Contribution Calculations Exclude Housing Allowance

Question:

Should 403(b) contributions and the subsequent match be based on the pastor's total income from the church (including housing allowance) or just from the salary minus housing allowance?

Answer:

According to Richard R. Hammar, J.D., LL.M., CPA, in his book 2015 Church & Clergy Tax Guide, “Section 107 of the tax code specifies that a minister’s housing allowance (or the annual rental value of a parsonage) is not included in the minister’s gross income for income tax reporting purposes. Therefore, it would appear that the definition of includible compensation for purposes of computing the limit on annual additions to a 403(b) plan would not include the portion of a minister’s housing allowance that is excludable from gross income." 

Hammar's Church Law and Tax Report is an excellent resource that many ministries should consider as annual subscribers.