Clergy Housing And Fair Rental Value
Your Clergy Housing Allowance is a benefit in which you allocate a portion of your compensation to a potential tax free benefit. In order to determine the tax benefit of your housing allowance, the IRS Tax Code allows clergy to exclude the LOWEST of the following from their taxable income.
The amount designated or allocated from compensation as Clergy Housing in advance
Amount of designated or allocated clergy housing used for qualified expenses
The Fair Rental Value of your home
In today's post, we are going to focus on the Fair Rental Value ONLY
The Fair Rental Value should be what you can rent the entire house for, but with two IMPORTANT key elements. The Fair Rental Value figure is the Rental Value (what you could rent it for) if UTILITIES ARE INCLUDED AND THE HOME IS FULLY FURNISHED. Also, the fair rental value figure should be determined by a real estate professional (either a real estate agent or a property management company). You can also hire an appraiser to come out and provide a fair rental value assessment, but that may cost money.
You may be thinking that this really doesn't apply to you because you simply only claim the "basics" with your clergy housing allowance (base mortgage payment, taxes, utilities and insurance) and that the rental value at minimum (if you were to rent your home out) would be greater than this amount. However, this is not accurate.
The issue may be that your mortgage repayment terms may be shorter than the 30 year mortgage many homeowners have. For example, if you did a 15 year mortgage instead of a 30 year mortgage, your qualified expenses may still be higher than just "basic" expenses. Also, not everyone has a mortgage which we will discuss later.
On the other hand, by not getting a fair rental value, you may be missing out on a tax break. Many homeowners have other expenses outside what are considered "basic" expenses (such as repairs and renovations of the home). Since those are considered qualified expenses, wouldn't it be nice to receive a tax break on those as well?
Also, what if you do not have a mortgage, but maybe you have other qualified expenses? Should you miss out on your clergy housing tax benefit just because you paid off the debt on your home?
You will also save time in the future by getting a fair rental value when determining your housing allowance amount with your employer. You can simply tell them to allocate the fair rental value of the home. Of course, when you prepare your tax return, you will need to make sure that you spent the housing allowance on qualified expenses to determine the actual tax benefit. But this will certainly make the subject of housing allowance with your employer a much easier discussion.
Remember, when determining your housing fair rental value be sure to use real estate professional. Please note that the IRS does not allow for you to look up the amount yourself using an online source. You must use a real estate professional. That way, if you are audited, you will have something to present to the auditor. If you don't get a Fair Rental Value, in the event of an audit, the IRS would get to determine their own Fair Rental Value (which will likely be an unfavorable number).