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Can the Church Sell the Parsonage and Give the Money to its Pastor?

Question:

How can the church and I work together to sell the parsonage and get my family into a home of our own?

Answer:

The answer varies greatly based on the church’s and minister’s specific situation. However, the following are several issues that likely need to be addressed.

      1. Any property transferred by the church to the minister will be considered taxable compensation at its fair market value (reduced by any payment by the minister to the church).

      2. Because the minister will no longer be living in real estate that is exempt from property taxes, his costs of living will increase accordingly.

      3. An excludable housing allowance is governed by a three-part test. Some ministers may believe that designating as housing allowance a one-time, large bonus from the church, which the pastor intends to use as a significant down payment, will fully qualify as exempt income under the three-part test. However, a large housing allowance designation may not fully eliminate the taxability of a one-time, large bonus to the minister even if entirely disbursed to construct or purchase a home. This is due to the requirement that a housing allowance cannot exceed the annual fair rental value of a minister’s housing.

      4. Interest-free (or below market rate) loans from the church to the minister can aid in the transition from a church’s “parsonage era” to home ownership for its minister. Further, forgiveness of loan principal arrangements in reward for ongoing longevity can also be beneficial. However, care must be taken to comply with the IRS income reporting rules. The interest rate benefit and principal forgiveness are generally taxable income. In order to avoid classification of a loan with a forgiveness provision as immediately taxable income, a longevity stipulation must be enforceable. A written agreement must be established which reflects the true substance of the legally binding longevity arrangement. Truly, it must be the expectation of both church and minister that early departure will result in a repayment to the church of any remaining balance.  

5. If the church does not want to require a longevity stipulation to the arrangement, it may at least consider splitting a bonus between two taxable years.

6. We strongly recommend that the church record the mortgage with the local county officials. This also protects the authenticity of the arrangement as "arms length" and the church from miscommunication that it has definite longevity expectations. 



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