Churches often provide ministers of the gospel with the free use of a home, which is often called a parsonage. The value of the parsonage is not subject to income tax up to the rental value of the home. The value of the parsonage is subject to self-employment tax.

Alternatively, a church may provide a minister with a cash housing allowance as a part of the minister's compensation. Such a housing allowance, up to the fair rental value of the house and associated furnishings, is not subject to income tax. In addition, money the minister receives from the church for utilities is not subject to income tax. However, the minister's housing allowance is subject to self-employment tax.

Who is a minister for the purpose of this exclusion? While determining who is a bona fide minister for this purpose dependsd on the facts and circumstances, a minister is usually an individual who conducts worship services, serves as a church administrator, or teaches at a religious school or seminary.

Although a taxpayer usually cannot deduct expenses incurred in connection with the production of tax-free income, a minister may deduct mortgage interest and real estate taxes for income tax purposes on a home the minister owns. The law allows the minister these deductions even though the housing allowance is not subject to income tax.

If the minister owns and lives in the home as the minister's primary residence for two or more years out of the last five years, and then sells it, the minister may use the exclusion of the gain on the sale of the home up to $250,000 if single or up to $500,000 if married.

A minister receives all the benefits of owning a home that any other homeowner receives. The ability to avoid income tax on a housing allowance adds to the benefits of owning a home for a minister. Therefore, a minister should generally prefer to own a home rather than receive the free use of a home owned by the church.

The exclusion from gross income of a housing allowance for a minister is a generous provision of Section 107 of the Internal Revenue Code. The tax benefits allowed to a minister are magnified with the ability to deduct mortgage interest and real estate taxes and exclude up to $250,000 ($500,000 if married) of the gain on the sale of the home. Ministers of the gospel should take advantage of these provisions so that they can minimize what they must render unto Caesar.

Alan D Campbell

Alan D Campbell holds CPA licenses in Florida and Arkansas. He is also a Certified Management Accountant and Certified Financial Planner certificant. He is also admitted to practice before the United States Tax Court. He has a Ph.D. in accounting from the University of North Texas with an emphasis in taxation.

He teaches an online class called "Finance and Accounting for the Nonfinancial Manager" for Villanova University in association with Bisk Education. He also advises the Business Environment and Concepts section of the Bisk CPA Review online for Bisk Education.

He is a co-author of the book Tax Strategies for the Self-Employed, which is published by CCH Incorporated. He is also the revision editor of CCH Financial and Estate Planning Guide, 15th edition. He has published articles on tax topics in The Tax Adviser, Taxes--The Tax Magazine, Taxation for Accountants, The CPA Journal, Tax Notes, Trusts & Estates, and The National Public Accountant.