The Pastor’s Housing Allowance – Part 3

When it comes to a pastor’s housing allowance, a pastor can designate any percentage or amount of their annual income as being their housing allowance. However, when a pastor actually files his taxes, he is required to “claim” the dollar amount that represents the least of the following three options:

1.  The amount actually designated as housing allowance.

2.  The amount actually spent on housing-related expenses.

3.  The amount of the fair-market rental value of a pastor’s home, fully furnished, with utilities.

Let’s think through the third of these three options.

The amount of the fair-market rental value of your home, fully furnished, with utilities refers to . . . well, exactly what it says. If you were going to rent out your home at a fair-market price in your area, how much would you be able to charge in rent per month? In addition, how much do you spend on all utilities throughout the year? Whatever that total number is, divide it by twelve, and that’s how much you would have to charge for utilities per month.

While those numbers shouldn’t be too hard to figure out, notice that the requirement is for the “fair-market rental value of your home, fully furnished, with utilities.” Now, depending on where you live, that may not be too hard to figure out. But for many pastors, especially those in rural or suburban settings, this is nearly impossible to objectively determine because very few people rent fully furnished homes anymore. So, how do we determine the rental value of our furnishings?

Unfortunately, the IRS provides us with no guidance on how to arrive at this number. What, then, should we do? Well, based on years of trying to find the best answer to this singular question, what I have decided to do is to choose a number/formula that seems reasonable to me based on our area, our home, and the quality and quantity of our furnishings, and then stick with that number/formula every year, with only modest increases to account for inflation.

By way of example only, let’s say that, in your neighborhood, the fair-market rental value of your home is $1,000/month. Given the area you live in, the quality of your home, and both the quality and quantity of your furnishings, you decide on a furnishings value formula equal to 20% of monthly rent . . . or $200/month. Add in the average cost of your monthly utilities (let’s say $300/month), and you now have a grand total fair-market rental value of your home, fully furnished, with utilities of $1,500/month or $18,000/year.[1]

If all of this seems far too subjective to you, you’re in good company. However, without clear guidance from the IRS, this kind of approach is likely the best you can do.

Before moving on, let me say one more thing about fair-market rental value. Since there is no single formula or approach I can give you that will make this easy or clear, the danger is that we either A) short-change ourselves by arriving at a number that is too low, or B) exaggerate this number to something outrageously and unjustifiably high. The former hurts you unnecessarily, and the latter is just plain dishonest. Please avoid both extremes.[2]

Of the three options listed above (1 - the amount actually designated as housing allowance, 2 - the amount actually spent on housing-related expenses, or 3 - the amount of the fair-market rental value of a pastor’s home, fully furnished, with utilities), whichever number is the least is the number you are allowed to claim as being your housing allowance for the year when you file your taxes. The remainder of your income will be counted as salary by the IRS.