Discussion:Minister's House Allowance

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Discussion Forum Index --> Tax Questions --> Minister's House Allowance


Jdugancpa (talk|edits) said:

24 August 2006
Minister obtains home equity LOC, proceeds used to pay off debts incurred for personal purposes. Logic tells me that just because the debt is secured by the home, it is not a housing expense. Logic won't convince my minister-client. Anyone have any source to point at to prove my point, or to prove that I am wrong and he is right?

1040man (talk|edits) said:

24 August 2006
Sure ... he can deduct the mortgage interest like the rest of us, if he can itemize.

JR1 (talk|edits) said:

August 24, 2006
Do some research. Actually, the payments for housing are indeed part of housing expense, AND the mortgage interest is also deductible on Sch. A. I don't recall having any pastors yet who had an ELOC...so I wonder whether it would qualify as well. It's moot if he's breaking the mid 20's for housing anyway, since that's probably getting near the upper limit for fair rental value. But if he's well under that...report back on what you find, unless someone else knows. Sandysea has a fair number of pastors I think...

Jdugancpa (talk|edits) said:

24 August 2006
1040man, the issue is not whether or not he can deduct the mortgage interest. Yes, he can. But ministers get to "double dip" in that the portion of their compensation that is designated as housing allowance is also excludable from taxable income to the extent that their actual housing expenses are equal to or greater than the amount so designated. JR also points out that the amount cannot exceed the fair rental value of the home.

JR, is the fair rental value the limit, or is it the fair rental value plus utilities and other expenses that even a renter would be required to pay? I'll look it up, but if you know, please holler. Thanks.

JR1 (talk|edits) said:

August 24, 2006
I came back to note as well, that that housing allowance must be approved by the board PRIOR to him receiving any of it. It's not a tax issue as much as a Church issue, limited by the fair rental value. And JDugan, good point, what I meant, and what IRS means, is fair rental value of a fully furnished and paid for house. Remember that this is merely a replacement for the church-owned parsonage...where everything was paid for by the church, except for food. I suppose you could go to fair rental plus plus, but it gets to include furniture, decorating, maintenance, replacement of stuff, and utilities and such.

Fumio (talk|edits) said:

24 August 2006
IRC 265(a)(6) provides that mtg interest and re taxes qualify as itemized deductions even though expenses are paid out of funds from housing allowance. This the "double dipping" (wow by a minister of god) is allowed by excluding housing allowance income under sec 107 while recovering deductions for int and re taxes

Jdugancpa (talk|edits) said:

24 August 2006
Maybe I have not made my question clear. Yes, the interest is deductible on Sch A, assuming it does not exceed the $100,000 home equity limitation, which it does not. The question is whether or not interest paid on a home equity loan, proceeds of which were used not to purchase housing for the minister but to pay off other personal debts, constitutes a "housing expense" substantiating the housing allowance exclusion from his income.


Example: Minister's salary is $50,000, W-2 Box 1 taxable wages $25,000, Box 14 shows housing allowance of $25,000. Housing expenses, including utilities, home mortgage, maintenance, etc, $21,000. Interest paid on HELOC, $5,000. Yes, the HELOC interest IS deductible on Schedule A. However, if the HELOC is a housing expense, he has fully used up his housing allowance. If not, he will have to recognize $4,000 in addition to the $25k shown in Box 1 of his W-2.

JR1 (talk|edits) said:

August 24, 2006
Oh, I understand the question...just waiting for an answer....Fumio was heading us down a different road.

So, HELOC payments. Are they considered part of housing? That's the question.

Jdugancpa (talk|edits) said:

24 August 2006
JR, I knew you knew. Fumio seemed to misunderstand my question. But here is my conclusion:

Sec 1.106-1(c) states: "A rental allowance must be included in the minister's gross income in the taxable year in which it is received, to the extent that such allowance is not used by him during such taxable year to rent or otherwise provide a home. Circumstances under which a rental allowance will be deemed to have been used to rent or provide a home will include cases in which the allowance is expended (1) for rent of a home, (2) for purchase of a home, and (3) for expenses directly related to providing a home. Expenses for food and servants are not considered for this purpose to be directly related to providing a home."

Since the proceeds of the loan were not used to provide housing, the interest on the HELOC is not factored into the determination of the housing allowance.

Death&Taxes (talk|edits) said:

24 August 2006
First, it is not the interest but the mortgage payment that eats up the housing allowance. A down payment on a house can also qualify for this use, BUT the mortgage payment must be to purchase or improve the home [including interest and principal]. Thus the HELOC that is not used to improve the house would not qualify. This is from the 2006 Tax Guide for Episcopal Ministers by Richard R Hammar, J.D. I suspect if Conrad Teitell is still writing he would agree. Readers may recall that the Fair Market Rental limit was put into law several years ago when the 9th Circuit halted a case and asked the government attorney to justify the non-taxable aspect of the allowance. As I recall, the plaintiff was claiming an allowance in excess of 200K. The Court's question panicked everyone, thus Congress rushed through the limitation.

Jdugancpa (talk|edits) said:

24 August 2006
Thanks. That's a wrap.

JR1 (talk|edits) said:

August 24, 2006
And a darned good one, too. Well done D&T. Thanks.

Tdoyle (talk|edits) said:

24 August 2006
If you haven't already seen it, TaxAlmanac has a number of Minister / Clergy Taxation articles, listed on the General Information page. For example, see Minister / Clergy Taxation.

- Tim Doyle, TaxAlmanac Moderator - Talk to me 16:48, 24 August 2006 (CDT)

Riley2 (talk|edits) said:

24 August 2006
Payments on a HELOC will not qualify for the 107 exclusion unless the proceeds are used to provide a home. See Reg. § 1.107-1(c) below.

Quoting directly from Reg. § 1.107-1(c), “…….Circumstances under which a rental allowance will be deemed to have been used to rent or provide a home will include cases in which the allowance is expended (1) for rent of a home, (2) for purchase of a home, and (3) for expenses directly related to providing a home……..”

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