Can a pastor still claim a housing allowance exemption when their house is paid off?
The answer is yes. In this post I’ll share some strategies you can use, even when your home is paid off, to claim a housing allowance exemption.
Over the last few posts, we asked and discussed the question, “Which is better for pastors with a housing allowance: A 15-year mortgage or 30-year mortgage?”
The question that often arises next, especially for those who choose a 15-year mortgage, is “Can a pastor claim a housing allowance if the house is paid off?
The good news is that you can still claim a housing allowance exemption whenever your house is paid off. Since you’ll have no mortgage, your housing allowance will be based just on your utilities, taxes, insurance, and other related household costs.
Some pastors choose a 30-year mortgage over a 15-year one because their mortgage payments will provide them with a larger housing allowance over 30 years instead of 15. The bad news is that, by choosing a 30-year mortgage instead of a 15, they’ll also pay thousands more in interest for their house.
Personally, my goal is to get my house paid off as soon as possible without regard to my pastor’s housing allowance, which could be changed, limited or even eliminated in the near future.
But, if I did want to pay it off in 15 years AND find a way to maximize my housing allowance after my home was paid off, here’s what I’d do: Take out a home equity loan to pay for needed or desired home improvements.
Think about it – the average life expectancy of most roofs, furnaces, flooring and appliances is 10-15 years. So, why not pay off your mortgage in 15 years and then take out a home equity loan to make improvements that are needed or desired at that time?
You can replace your worn out flooring, appliances, or roof, or build a new deck, redo your landscaping, remodel the basement or build an addition.
Your home equity loan payments can count toward your housing allowance, to the extent that you used the loan for home repairs, improvements, and furnishings. And the interest on home equity loans is deductible to the extent that you use the loan for home repairs and improvements.
I think this is a great way to take advantage of the clergy housing allowance after the home is paid off. What do you think?
Don’t miss:
- IRS tax help for pastors
- Pastor housing: Parsonage or Housing Allowance?
- How to Determine a Pastor’s Salary?
About the author
Aren’t Home Equity loans a higher rate of interest than the original mortgage? But another question. If I pay off the balance of my mortgage, using money from a Traditional IRA or otherwise qualified retirement plan, is the full amount tax free?
Greg, thanks for your comment. Yes, home equity loan rates are typically higher than mortgage rates. Re: your second question, if you take money from your Traditional IRA to pay the mortgage, it seems like you would owe tax on the distribution, plus a 10% penalty if you take a withdrawal before you’re 59 1/2 (of course, I don’t know how old you are). The distribution, depending on the amount, may also put you into a higher tax bracket. I recommend you check with a qualified financial advisor who can speak to your specific situation.
And wouldn’t money spent on repairing the house be eligible for the parsonage allowance without taking out another loan?
That’s a good and complicated question. Current law states that clergy may claim a housing allowance that is the lesser amount of three factors: 1. The amount of housing allowance your church declares for you, 2. The fair rental value of your home, or 3. Your actual housing expenses.
So let’s say your church declared a housing allowance of $20,000 for you, your actual housing expenses were $12,000 (assuming the mortgage is paid off, you just have utilities, furnishings, taxes, insurance, etc.) but you made repairs and improvements of $15,000 so when you add those two together, your our actual expenses are $27,000, and the fair rental value of your fully-furnished house plus utilities was $2,000 a month, or $24,000 for the year. In this scenario, the amount of housing allowance that you can claim is $20,000, because that was the lesser of the three factors. But looking at it another way, suppose the church declared a $30,000 housing allowance for you, and you had the $27,000 in actual expenses including the repairs. Now you can only claim the $24,000 because that is the fair market rental value of the home, even though your expenses were higher. So in some cases, if you’re doing major repairs and improvements, it may be more advantageous to wrap that into a loan so it counts more toward your housing allowance over time. As always, please consult a financial advisor who can help you make the best decision based on your personal situation. Thanks!
If a church board members decide to payoff pastors home for his 30 years of service as pastor, how can that donation not be taxable income to the pastor or how to set it up the transaction?