Housing allowances: expanded benefits and planning opportunities.

• Author: Moore, Philip E.

In Warren, 114 TC No. 23, the Tax Court intervened in a long-standing IRS policy that had capped ministers' housing allowances (MHAs) at the rental value of the home. Under this decision, all amounts designated as an MHA and used by a minister to provide a home may be excluded from income. Many ministers will experience significant tax savings if they satisfy some relatively easy and familiar requirements.

Housing Allowances

Since 1939, ministers have been allowed to exclude from income the value of a home or parsonage provided for them. In 1954, Congress moved to end the discrimination against ministers who receive an MHA and buy their own homes. Sec. 107 allows a minister to exclude from income the "allowance paid to him as part of his compensation, to the extent used by him to provide a home"

An MHA is an exclusion from income, not a deduction. This is money the church pays the minister that does not have to be reported as income. However, the portion of the MHA used to pay mortgage interest and real property taxes is deductible as an itemized deduction on Schedule A. These deductions create the possibility of a double tax benefit. In addition, recent legislation prevents the gain from a home sale from ever being taxed, unless the gain exceeds $500,000 ($250,000 on a single return) or a home is sold more often than every two years. The combination of these three benefits (income exclusion, itemized deductions and gain-on-sale exclusion) make a minister's home the perfect tax shelter. This shelter will even survive the minister; heirs can use as their tax basis the value of' the home at the time of the minister's death.

Although the MHA is a wonderful income tax shelter, it does not shelter income from Social Security taxes; the minister must pay Social Security taxes on his MHA.

Amount of the MHA

For years, the Service's official position has been that the amount excluded from income is the smallest of the following:

1. The amount used to provide a home, i.e., the total of actual housing expenses, including mortgage payments or rent, taxes, insurance, furnishings, repairs, improvements and utilities (including garbage pickup and local telephone).

2. The amount officially designated by the church.

3. The fair rental value of the home, including utilities and furnishings.

Warren

Dr. Warren was minister of the Saddleback Valley Community Church in California. In the years at issue, the church designated all (or virtually all) of Dr. Warren's...