Ethical delima - take clergy housing allowance when they didn't actually live there?

[erchess]

Several Years Ago

I did a return for a dual status Pastor who had moved at the end of June of the taxable year from a Church where she lived in the parsonage to a Church where she lived in what had been her vacation home and received a housing allowance. I don't remember exactly how I worked this out in my software but my solution involved manually preparing two clergy forms, one for each Church and then doing some overrides to get the computer to agree with what I thought was the correct bottom line. What was the correct thing to do in this case? It can't be uncommon for a pastor to change from Parsonage to Housing Allowance during a taxable year and I can't believe the situation should be as hard as I found it to be.

[JohnH]

It really isn't an "either or" situation, because even a pastor living in a parsonage should receive a Housing & Utilities allowance from his church in order to cover utilities and any other allowable housing expenditures. They sometimes redecorate the parsonage to personal tastes or pay for repairs to appliances, etc, and all that is excludable if the pastor pays for it and the H&U allowance is set sufficiently high. It's just that the size of the allowance would usually be different once he moves from a personally-owned residence to a parsonage.

In my case, it's a matter of the pastor having to continue paying mortgage payments, property taxes, utilities, etc on the former property which is no longer his residence. He still gets to deduct the interest & property taxes on Schedule A, but he can't simultaneously exclude it from taxable income as a non-taxable H&U allowance. He also can no longer exclude property insurance, telephone service, garbage collection, etc on the former residence from income. I just wanted to be sure I was giving him correct info on that score, especially since he is losing the tax benefit of excluding a significant part of the H&U and ALSO having to pull additional income into the S/E tax calculation (the FMV of the parsonage he is now living in).

This situation is unusual in that he is still receiving a significant H&U allowance ($36K) because he only plans to live in the parsonage until he can sell his old residence and buy a new one. Given that he loses the exclusion from income of the part of the H&U allowance spent on the old residence but he would immediately pick it up when he buys the new one, he has significant incentive to get the deals done. Anybody interested in a nice home in NC at a good price from a highly motivated seller?

[erchess]

Not an Either/Or??

I definitely thought that a minister who lived in the same place all year could exclude from tax either a housing allowance or the fair rental value of a parsonage but not both.

[JohnH]

Not exactly. Even a pastor who lives in a church-supplied parsonage should still have part of his/her salary designated to be paid as a reasonable H&U allowance because he/she can exclude from income any housing-related expenses he/she actually pays, such as utilities, phone, improvements to the property, etc. The key is that the total H&U allowance, including the FRV of the parsonage which is added to S/E income, cannot exceed the FRV of the property including furnishings and utilities. Maybe Mike should explain this - he's much better at it than I am.

[MAMalody]

JohnH, I don't remember the cite, however, I may have misread your earlier posting. A pastor may receive, in effect, two housing allowances, due to a ministry relocation that would mean that he has two houses. He would still be required to have the prior designation. I don't remember for sure, however, I believe that the time period could even extend beyond a year. I would have to do some research on this. The key would be that it remains vacant. If I have thoroughly confused you, drop me a line at ClergyTaxes@aol.com and I will try to clarify. Be advised that if you e-mail me, you will not received the benefit of peer review that his board offers.

erchess, in your case I do the same thing. However, I use an excell spreadsheet that my software allows me to import. I then just link the answers to the appropriate forms in the tax program. Your problem is not the computation, it is the software limitations. And Snaggletooth is correct when he said that the housing allowance is limited to the lower of:
1. Amount designated by the church
2. Fair rental value of home.
3. Actual expenses.

[JohnH]

Mike:
That's great news about the relocation provision.
I'm trying to find something on it, and I'll also send you an email.
Thanks very much for your persistence.