Clergy home expenses

[Academy Tax]

An ordained minister receiving a housing allowance from his church replaces an aging roof and heatpump on his owned home. Can he claim such expenditures as "costs of maintaining his home" or must he capitalize these expenditures as adjustment of the basis of his home??

[ATSMAN]

I think that would be adjustment to basis.

[ChEAr$]

I think that would be adjustment to basis.

but after another adjustment maybe for the tax credit obtained for the heat pump?

[JohnH]

I've never handled a clergy return where a roof was completely replaced, but I'm fairly certain it can be counted as a part of the housing allowance, as can the net cost of the HVAC system. There is no requirement to distinguish between "repairs" and "capital expenditures" when adding up the expenditures related to the H&U allowance. For example, a down payment on a home purchase can be included as a H&U expenditure.

There is, however, an overall limitation, which is that the amount excluded from income cannot exceed the lesser of :
1) The amount designated (in advance of payment to the clergyperson) as H&U allowance;
2) The amount actually expended;
3) The fair renal value of the property, fully furnished and utilites provided.

[Burke]

John is correct. For purposes of calculating the housing allowance, you count such repairs/etc. For purposes of selling the home, or other basis requirements such as converting to rental property, you capitalize these expenditures, less --- as Chear$ referenced -- any tax credits taken.

[taxmanken]

Consider using installment cost

Although the entire cost of replacing the roof can be considered a current year housing expense, it is entirely likely that adding that cost to the other housing costs will push the total housing expenditures for the year over the designated amount or the FAIR RENTAL VALUE of the home. In either case, some of the benefit of clergy housing exclusion would be lost. If that is the case it would be prudent for the pastor to not pay all of the roofing costs the first year and thereby be able to exclude the entire amount over the period of years that he is paying the expenditure. I frequently advise my clergy clients to not make full payment in one year on large expenditures.

[MAMalody]

I agree that JohnH got it right. Taxmanken has a great idea also. The big issue here is that it looks like we are playing catchup. The pastor needed to keep the preparer in tune with that is going on for the best planning to take place. I can't tell from the OP if this is a 2012 question or a 2013 question or how much after the fact it could be. Unfortunately, it sounds like a done deal.

[Academy Tax]

Thanks guys for the great help and insights!

[JohnH]

That was a very insightful post by taxmanken about splitting capital expenditures into a couple of years in order to maximize the tax benefit of the exclusion form income. Thanks for mentioning that - I'm betting anyone who has clergy clients will find an application for that strategy in the future.

[MAMalody]

I agree it is a great strategy, however, it is iincumbant upon the pastor to keep you informed of his situation. In my experience, I usually find out when preparing the return in the following year and it is too late.