Section 107 Housing Allowance

A pastor must satisfy the following conditions before he can exclude the housing allowance from gross income.

1. A designated housing allowance must be used for a home, that is, “a dwelling place (including furnishings) and the appurtenances thereto, such as a garage.”²³ Monies spent by a pastor on a farm or business in addition to the amounts spent on the house will not qualify for the housing allowance exemption.²⁴

2. The employing church must state its intent, in writing, that a portion of the pastor’s salary is for housing.²⁵ It is important to the IRS that the church’s intent and the percentage or dollar amount be spelled out in the clearest terms covering what is and what is not included in the pastor’s housing allowance, i.e., furnishings, utilities, garage rental, etc.

First Apostolic Church Housing Allowance Policy for Ministers:

Mortgage or rental expense (mortgage include principle + interest)

Utilities (Gas, electric, water, sewage, phone, WiFi)

Furnishings (furniture, décor, utensils)

Maintenance (lawn care, snow removal, house repairs, tools)

Supplies (linens, paper, cleaning supplies, all except food products)

3. Amounts excluded from taxation are limited to the actual housing expenses the pastor incurs during the particular taxable year. What do “expenses incurred to rent or provide a home” include? The IRS allows rents paid for housing, amounts paid for the purchase of a home, and costs related to providing a home.²⁶ A church may help the pastor here considerably by agreeing to pay for furnishings, appurtenances, utilities, property taxes, insurance for the home, and repairs to the home.

4. The amount of the housing allowance designated to the pastor is limited to an amount not more than the reasonable value of the pastor’s services to the church or religious organization, i.e., his earnings.²⁷ If the pastor owns his own home, the housing allowance designated by the church or religious organization may not be greater than either the fair rental value of the pastor’s home (including furnishings and costs of utilities) or the church-designated allowance.²⁸ The same limits hold true for the pastor who rents an apartment or other dwelling while serving in the pastorate. The pastor who lives in a parsonage (a residence owned by a church or religious organization), may exclude from his income the fair market rental value of the parsonage. The pastor may also include the cost of utilities and furnishings if the church so allows.

The housing allowance is not reported on the pastor’s income tax return. In addition, the W–2 form, issued by the church to the pastor, should not include or list the housing exclusion. For example, if a pastor is paid $35,000 but the church directs that $15,000 should pay for the housing allowance, the W–2 form should list only $20,000 as taxable income. If the pastor is self-employed, the church should report the pastor’s salary without including the housing allowance on Form 1099. Any amounts given which exceed the designated housing allowance should be listed as income.

Who qualifies for the housing allowance exemption? Does the “minister of music” or the “minister of education”? IRS revenue rulings have held these individuals are not entitled to the housing allowance exclusion, because these offices do not fit the IRS definition of “an ordained, commissioned, or licensed minister of the gospel.”²⁹ Ministers qualify for the housing allowance only if they are licensed or ordained by their religious denomination or body, and if they perform “substantially all of the religious functions” of an ordained pastor.³⁰ New court cases have given insight into an expanded definition of “ordained.” Before 1978, Rev. Ruling 65–124 was very strict in stating that a minister had to be able to perform “all” the religious functions of the church to be defined as “ordained” for tax purposes. In 1978, Rev. Ruling 78–301 added the word “substantially” to the definition in order to allow Jewish cantors to qualify for parsonage allowance. Until 1989, no case was available to give us a clear definition of the word “substantially.” Surviving spouses of deceased pastors do not qualify for the housing exclusion. Also, retired pastors must meet the above listed conditions to remain qualified for the housing exemption.³¹

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²³ Treas. Reg. § 1.107–1(b).

²⁴ Treas. Reg. § 1.107–1(c).

²⁵ Treas. Reg. § 1.107–1(b).

²⁶ Treas. Reg. § 1.107–1(c).

²⁷ Rev. Rul. 78–448, 1978–2 C.B. 105.

²⁸ Rev. Rul. 71–280, 1972–2 C.B. 92.

²⁹ Rev. Rul. 59–270, 1959–2 C.B. 44.

³⁰ Rev. Rul. 78–301, 1978–2 C.B. 103.

³¹ IRS Publication 517.

^[1] House, H. W. (1999). Christian ministries and the law : Revised edition (147). Grand Rapids, Mich.: Kregel.