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

Church Car Purchase for Pastor

By
Question: A church would like to purchase a car for the pastor's use. What is the best method to accomplish this goal? Should the car be titled in the pastor's name? What will be the tax consequences of this arrangement? Answer: The church has two main alternatives for this purchase:  Title the car in the pastor's name and reimburse him for business expenses Title it in the church's name and treat personal use as taxable compensation There are fewer immediate tax consequences for the latter. Since both are viable options, we will discuss both situations in this post. If the church chooses to give the car to the pastor and register it in his name, he is free to use it for whatever personal use he desires with no tax consequences. However, the fair value of the car is taxable as compensation at the time it is given to the pastor. Internal Revenue Code section 102(c) clearly states that gifts given to employees by their employers are taxable compensation. The...
2 comments
Read more

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

Can Form 4361 be filed after the deadline?

By
Question:   Is it possible to opt out of Social Security after the 2-year deadline? Answer:  Unlike other employees, a licensed or ordained minister has the option to opt out of Social Security and Medicare (FICA). If a minister wants to opt out they must file Form 4361 by the tax deadline including extension, in the second year in which they have received ministerial income of $400 or more. This election is final, and the minister cannot opt back into FICA taxes.  At MinistryCPA, we have received questions from ministers who have exceeded the two year deadline and desire to opt-out. There have been several court cases which provide guidance in answering this question. Some have argued that the minister was unaware of the deadline, had mistakenly believed they had filed a timely election, were given incorrect advice by an IRS employee, or their opposition to participate in Social Security and Medicare did not arise until after the 2-year deadline had passed. In each of th...
Post a Comment
Read more