The answer to this question varies greatly based on the church’s and minister’s specific situation. However, following are several issues that most likely will need to be addressed.

1. Any property transferred by the church to the minister will be considered taxable compensation at its fair market value (reduced by any payment by the minister to the church).

2. Because the minister will no longer be living in real estate that is tax-exempt housing, his costs of living will increase accordingly.

3. The tax-free nature of a housing allowance may not fully eliminate the taxability of any one-time, large bonuses to the minister, even if entirely disbursed to construct or purchase a home. This is due the requirement that a housing allowance not exceed the annual fair rental value of a minister’s housing.

4. Interest-free (or below market rate) loans from the employer to the minister or principal forgiveness arrangements in reward for ongoing longevity can aid in the transition from a church’s “parsonage era” to homeownership for its minister. Care must be taken, however, to comply with IRS income reporting rules and to establish a written agreement that reflects the true substance of a legally binding arrangement between the church and its minister.

Tax-saving opportunity: December and January “bonuses” to assist the minister in constructing or purchasing a home, if implemented properly, can spread the income and self-employment tax costs over two different tax years. Principal forgiveness arrangements established as legitimate compensation for ongoing longevity can spread these tax costs over several consecutive years.

This information is provided as a service of MinistryCPA.org to ministers and Christian ministries. Please contact us or your personal professional advisor to determine how this information may apply to your own situation.