Skip to main content

Determining the Fair Rental Value (FRV) of a Parsonage

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

Popular posts from this blog

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: 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

Special Topic: U.S. Olympic Champion Ben Peterson's Autobiography "Road to Gold"

Road to Gold , by Ben Peterson We are privileged to serve our client Ben Peterson and Camp of Champs, the wrestling ministry he founded   and directs. Ben wrestled for more than 16 years, coached on a collegiate level for 28  years, and has directed Camp of Champs for more than 40 years. We have read his autobiography and found Ben's dedication to the sport and his faith to be inspiring. If you are looking for a good story we highly recommend Ben's  Road to Gold. In Road to Gold , Ben shares the lessons he learned throughout his upbringing and how they led him to achieve Olympic victory. Ben states a key element of his youth was the consistency of his parents. He was encouraged to read the Bible every day from an early age, which he now describes as the most stabilizing habit in his life. Throughout his story Ben also emphasizes the importance of confidence, solid goals, hard work, and consistency. These qualities helped Ben throughout his life and wrestling career, from learni

When you don't know what you don't know

Here at MinistryCPA, we recognize that many churches rely on volunteers and/or part-time treasurers and financial secretaries.  With this in mind, we seek to come alongside ministries in providing the much-needed support to ensure that they are operating in a manner that is both compliant with governing authorities and taking advantage of opportunities for improved stewardship of ministry and employer financial resources.  Please consider this brief checklist to determine if your ministry needs to look further into areas that could be classified as “We don’t know if we are compliant.” Please check all compliance requirements that are currently being met: File quarterly Form 941 or annual Form 944 with the IRS Issue Forms W-2 to all employees and File Forms W-2/ W-3 with SSA Ministerial Housing Allowance is only listed in box 14 of the Form W-2 – it is not included in box 1 Obtain Form W-9 from all individuals/businesses that are paid the cumulative total of $600 or more in the year f