Skip to main content

Determining the Fair Rental Value (FRV) of a Parsonage

By

Question: 

How do I calculate the Fair Rental Value of my home used to determine my Housing Allowance exclusion?

Answer:

Fair Rental Value (FRV) is important to establish when a minister is provided a parsonage or housing allowance. When a pastor is provided a parsonage, the fair rental value he reports is subject to SECA tax (social security and Medicare). The fair rental value is also a factor in the three part test used to determine how much a pastor can exclude as housing allowance. IRS Publication 517 (Jan 2020) describes that under the three part test, a minister "may exclude from gross income the smallest of 1) the amount actually used to provide a home, 2) the amount officially designated as a housing allowance, or 3) the fair rental value of the home, including furnishings, utilities, garage, etc." 

Because fair rental value is needed both when a minister has a parsonage and a housing allowance MinistryCPA often receives questions regarding its calculation. Furthermore, the IRS does not provide clear guidance on this issue. The IRS Ministers Audit Techniques Guide (April 2009) simply states that "determining the fair rental value is a question of all facts and circumstances based on the local market." It is important to note that the fair rental value is of the furnished home, and includes utilities. 

There are a several ways in which the fair rental value of a home might be determined. 

One relatively simple way to estimate fair rental value is by using Zillow or another similar website. For most homes, Zillow provides an estimate of both the fair rental value and total market value of the home. When using one of these estimates it is still important to consider whether the value is reasonable and accurate. Further, these estimates do not anticipate additional fair rental value for furnishings and for utilities.

A second way of calculating fair rental value is based on the home's assessed or appraised value. This value can be taken from a recent real estate tax bill or appraisal, and multiplied by an estimated multiplier or rate. A reasonable rate is typically between 8-15%. The low and high end of this range reflects communities that have generally below or above national market rental rates. For example, assume the assessed value of the home is $200,000. Using 10% as a multiplier, the fair rental value is $20,000 per year.

A third alternative is to base fair rental value on a realtor's informal opinion, which often provides a range of potential values. Some people even recommend hiring a local real estate appraiser to provide an official appraisal, which is typically costly. We believe these options to be unnecessary in most situations.

Whichever method is used to calculate fair rental value, it is important that good, clear documentation is kept. Ultimately the fair rental value should be both reasonable and comparable to similar homes in the community.



Comments

Post a Comment

Popular posts from this blog

Rental of a Church Parsonage to a Non-Minister

By
Question: A church owns a parsonage, but the pastor does not use it as he owns his own home. The church rents the parsonage to a tenant other than a minister or employee of the church. Will the church be responsible for paying income tax on these monies as Unrelated Business Income (filing a Form 990-T) even if the money is used to carry on the business of the church? Answer: Whether the money is used for church purposes is irrelevant.  IRS Publication 598  states: "If an exempt organization regularly carries on a trade or business not substantially related to its exempt purpose, except that it provides funds to carry out that purpose, the organization is subject to tax on its income from that unrelated trade or business." Fortunately, in the case of rental income from real property, such income is "excluded in computing unrelated business taxable income" (Publication 598). Caution: see content below regarding debt-financed property.  However, a second concern not a
Post a Comment
Read more

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

By Anonymous
Question: A church rented space from another church last year. Should it request a completed Form W-9 and issue Form 1099-MISC? Answer: Payments from one 501(c)(3) organization to another 501(c)(3) organization are not subject to Form 1099-MISC reporting. The IRS 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 missionaries
2 comments
Read more

Form 944 or 941 Filing for Churches

By Anonymous
Question:   A new church filed for an employer identification number (EIN) recently. It received notification from the IRS about the EIN, stating that the church must file Form 944 by the following January deadline. The church has no non-ministerial staff members. Since income tax withholding is elective by ministers and none of the pastors has elected to request non-mandatory withholding is the church required to file Form 944 annually? Also, a quarterly Form 941 (rather than an annual Form 944) is required of some employers. Which IRS form, if any, should be filed? Answer: According to IRS Section 1402(c) and 3121(c), ministers are not subject to mandatory income tax withholding. Unless one or more ministerial employees request non-mandatory withholding, church employers with only ministerial employees do not need to file Form 941 or Form 944.  The IRS  Ministers Audit Technique Guide  explains in further detail a minister's treatments for social security, Medicare tax, Fed
Post a Comment
Read more