“Should our church continue providing a parsonage, or should we provide a cash housing allowance and allow our pastor to purchase a home?”
There is no single answer that is right for every church or pastor. A parsonage can provide affordable, convenient housing and reduce the pastor’s responsibility for maintenance. A cash housing allowance can give the pastor greater choice and an opportunity to build equity in a personal residence.
The best decision should reflect the church’s financial resources, the local housing market, the condition and location of the parsonage, and the pastor’s current and long-term needs.
When a Parsonage May Be the Better Choice
Continuing to provide a parsonage may make sense when:
- The parsonage is attached to or located near the church and would be difficult to sell or use for another purpose.
- Suitable homes are scarce or unusually expensive in the community.
- The pastor does not have the funds or desire to purchase a home.
- Providing a parsonage helps the church attract pastoral candidates or makes future transitions easier.
- The church can maintain the property more affordably than it could provide an adequate cash housing allowance.
- The parsonage offers better housing than the pastor could reasonably obtain in the local market.
A parsonage also protects the pastor from some of the financial risks and responsibilities of homeownership. The church ordinarily remains responsible for major repairs, maintenance, insurance, and other ownership costs.
However, a pastor living in a parsonage does not build equity in that home. This can create a significant housing need at retirement or when the pastor leaves ministry.
When a Cash Housing Allowance May Be the Better Choice
Providing a cash housing allowance may make sense when:
- The pastor wants the freedom to select the location and type of home.
- Suitable housing is available and reasonably affordable.
- The pastor is financially prepared for a down payment, maintenance, insurance, taxes, and the other costs of homeownership.
- The church wants to avoid the expense of purchasing, renovating, or maintaining a parsonage.
- Homeownership could help the pastor build equity and prepare for future housing needs.
- The arrangement may encourage stability and a longer-term connection to the community.
Homeownership also involves risk. Property values can decline, repairs can be expensive, and a home may be difficult to sell when the pastor accepts another position. Neither the church nor the pastor should assume that purchasing a home will always produce a financial gain.
A cash housing allowance should be reviewed regularly as housing costs and the pastor’s circumstances change.
How the Federal Housing Allowance Exclusion Works
A properly designated housing allowance may be excluded from a qualifying minister’s federal gross income to the extent permitted by law.
For a minister who owns or rents a home, the amount of their compensation that may be excluded from taxable income is limited to the lowest of:
- The amount officially designated in advance as housing allowance
- The amount of their income actually used for qualified housing expenses during the year to provide a home
- The home’s fair rental value, including furnishings and utilities
The amount excluded also cannot exceed reasonable compensation for the minister’s services. Any portion that does not qualify for exclusion must generally be reported as taxable income.
When a church provides a parsonage, a qualifying minister may generally exclude the fair rental value of the home from federal gross income. A properly designated cash allowance for eligible expenses such as utilities or furnishings may also qualify, subject to the applicable limits.
But please note, while the housing allowance exclusion provides savings on income taxes, it does not have the same effect on payroll taxes. As a “dual status” taxpayer, the IRS considers ministers to be employees of the church for income taxes but self-employed for payroll tax purposes. So, the housing allowance or fair rental value of a church-provided parsonage is generally included when calculating the minister’s net earnings from self-employment. That higher self-employment income figure is used to determine the payroll taxes for Social Security and Medicare, also known as SECA.]
For current IRS guidance, see:
Mortgage Interest and Property Taxes
A homeowner who receives a housing allowance may also be able to claim deductions for mortgage interest and real property taxes if the homeowner itemizes deductions and otherwise meets current IRS requirements.
These deductions are subject to limitations that can change from year to year. Churches and ministers should avoid assuming that every homeowner will receive the same tax benefits. Individual circumstances and changing tax laws make it necessary to review and revise compensation plans regularly for the benefit of both the pastor and the church.
Selling a Pastor’s Home
A pastor who later sells a principal residence may qualify to exclude some of the gain from federal income tax.
Currently, the maximum exclusion is generally:
- Up to $250,000 for an eligible individual
- Up to $500,000 for certain married couples filing jointly
Eligibility depends on ownership, use, and timing requirements. Generally, the homeowner must have owned and used the property as a principal residence for at least two of the five years before the sale and must meet the IRS rules regarding previous exclusions.
See IRS Publication 523, Selling Your Home, for current requirements and exclusion amounts.
Use Care When Selling or Transferring a Parsonage
A church considering selling a parsonage to its pastor should obtain professional guidance before setting the price or completing the transaction.
Selling property below fair market value or transferring it as a “gift” may create taxable compensation, private-benefit, excess-benefit, or state-law concerns. The church should obtain an independent appraisal, document the decision-making process, and consult qualified legal and tax professionals.
A church should also seek advice before lending money to a pastor for a home purchase. Loans must comply with applicable federal and state laws and should be documented with reasonable terms.
If the church plans to sell or rent the former parsonage to someone else, it should consult a tax professional about the consequences. Rental income from real property is often excluded from unrelated business taxable income, but exceptions can apply depending on the property, financing, services provided, and terms of the arrangement.
For general information, see IRS Publication 598, Tax on Unrelated Business Income of Exempt Organizations.
If the Church Keeps the Parsonage
Keeping a parsonage does not mean the pastor’s future housing needs must go unaddressed.
A church can consider making additional employer contributions to the pastor’s retirement account. This can help a pastor who is not building home equity prepare for housing and other financial needs in retirement.
Employer contributions and investment earnings may receive tax-deferred treatment, subject to current contribution limits, plan provisions, and federal tax law. Distributions are generally taxable unless a specific exclusion applies.
Eligible retired ministers may be able to exclude qualifying retirement-plan distributions designated as a housing allowance by an eligible church plan like Servant Solutions, subject to the same housing-allowance limitations that generally apply during active ministry. The designation and administration of retirement housing allowance depend on the type of retirement plan and its governing provisions. IRAs and non-church plan distributions do not qualify for this important tax savings for retired ministers.
Servant Solutions can help participating churches understand the retirement-plan options available to support their ministers’ long-term financial security.
Questions to Consider Together
Before making a decision, the church board and pastor should consider:
- What are the true annual costs of maintaining the parsonage?
- What amount would constitute an adequate housing allowance in the local market?
- Is the pastor financially prepared for home ownership?
- What is the condition and potential future use of the parsonage?
- How would either decision affect future pastoral transitions?
- Is the pastor building adequate resources for housing in retirement?
- Has the church obtained appropriate legal, tax, real estate, and financial guidance?
The choice between a parsonage and a housing allowance is about more than taxes. It is an opportunity for the church and pastor to plan carefully, communicate openly, and consider both present ministry needs and long-term financial well-being.
Important Notice
This information is general in nature and is provided for educational purposes only. It is not intended as legal, accounting, investment, real-estate, or tax advice. Federal and state laws can change, and their application depends on the specific facts involved. Churches and ministers should consult qualified legal and tax professionals before establishing or changing a housing arrangement.