The clergy housing allowance exemption, one of the biggest tax breaks for American pastors, is under review and may be modified in the near future.
The Evangelical Council for Financial Accountability (ECFA), a national accreditation organization for churches and other religious organizations, is leading an independent national effort to review and provide input on whether legislation is needed to curb abuses of the clergy housing allowance exclusion, in addition to major accountability and policy issues.
The housing allowance exemption, enacted by the Revenue Act of 1921, allows American pastors to exclude the fair rental value of their home from their gross income for tax purposes.
This exemption has been a real financial blessing to pastors – the majority of whom work in “typical” or traditional churches and live on modest incomes.
Sadly, the housing allowance exemption has been abused by a few high-profile televangelists, and other highly-compensated pastors, who live in lavish homes and have very large housing allowances, bringing it under scrutiny for all pastors.
ECFA launched this new accountability commission at the request of U.S. Senate Finance Committee member, Charles Grassley (R-IA), whose staff just completed a three-year inquiry into the finances of six high-profile media-based Christian ministries.
Likely Changes to Clergy Housing Allowance Exemption
While the Accountability Commission’s work has just begun, I think we can predict at least two likely outcomes to help prevent abuse of the clergy housing allowance:
- Dollar limits will be imposed on the amount of the housing allowance exemption, to eliminate very large housing allowances on lavish homes.
- The housing allowance exemption will be limited to one residence (the primary residence of the pastor) and not multiple residences as allowed by the Tax Court in a 2010 ruling.
None of these likely changes would negatively impact the majority of pastors who live modest lifestyles. But any change or limit today could open the door to further limits down the road, which might impact more pastors.
How do you think these possible changes might impact you?
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My husband is an ordained minister. We own our house and have no payments. we do, however, have an equity loan on our house. I know that we can deduct the interest on that loan but can we deduct the payments as well?
Velva, thanks for your question. When you say “deduct,” do you mean an itemized tax deduction? If so, only the interest on mortgages or home equity loans are deductible. But if you’re asking if home equity loan payments can be included as part of a pastor’s housing allowance exemption, my understanding is that they can be, but only when the loan was used for eligible housing expenses. In other words, you could not purchase a vacation or a car with a home equity loan and then include those payments as part of your housing allowance exemption. But please be sure to check with a CPA or tax advisor for a definitive answer. Thanks!