3.14 Minister’s Rental or Housing Allowance
A duly ordained minister pays no tax on the rental value of a home provided as part of his or her pay. If a minister is provided with an allowance rather than a home itself, the allowance is generally tax free if used to pay rent, to make a down payment to buy a house, to pay mortgage installments, or for utilities, interest, tax, and repair expenses of the house. However, the exclusion for an allowance is limited to the fair rental value of the home, including furnishings and appurtenances such as a garage, plus the cost of utilities. A rabbi or cantor is treated the same as a minister for purposes of the allowance or in-kind housing exclusion.
The Tax Court has held that the parsonage allowance exclusion is allowed for expenses of a second home as well as for a principal residence. However, the Eleventh Circuit appeals court reversed the Tax Court, concluding that the parsonage allowance can apply only to one home.
The church or local congregation must officially designate the part of the minister’s compensation that is a rental or housing allowance. To qualify for tax-free treatment, the designation must be made in advance of the payments. Official action may be shown by an employment contract, minutes, a resolution, or a budget allowance.
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