I don’t know about your neighborhood, but in mine, real estate is on fire. Houses that usually take several months to sell are now under contract within a matter of days. This sudden housing boom has caught a lot of people by surprise, especially since everywhere else you look the economy is struggling under the weight of COVID-19. However, with interest rates at record lows and people spending a lot more time at home with their families, it does make sense.
In addition to the houses on my street selling quickly, I have also been getting questions from readers who are jumping into the fray and buying homes. The big question for pastors is, Does a down payment qualify for the housing allowance? The answer is yes, but with a few caveats.
A Housing Allowance Must Always Be Pre-Designated
First of all, the minister’s housing allowance is always proactive, never retroactive. It must be designated in advance for expenses to qualify. You cannot buy a home and then adjust your housing allowance to cover the purchase. Once you’ve spent the money, you can’t go back and call it a housing allowance.
If you’re planning to buy a home, you need to have your housing allowance changed BEFORE you make the purchase. It must be officially designated by your church or employing organization, so you need to make a request in advance. How far in advance depends upon how quickly they work.
Remember, it is easy to adjust for excess housing allowance at the end of the year, but there’s no second chance if you do not claim enough. Thus, it’s usually better to cover your bases and ask for an increased allowance even if you are not 100% sure that your purchase will go through.
There Are Limitations To The Amount Of Housing Allowance You Can Claim
Even though it is an eligible expense, your entire down payment may not qualify for the clergy housing allowance. That is because the government has placed limits on how much you can claim. The allowed housing exemption is limited to the LESSER of:
- Your actual housing expenses
- The fair market rental value of the furnished home, including utilities
- 100% of ministerial compensation
The one that gets most pastors is the second point, the fair market rental value of the home. In most cases, a down payment will push your actual housing expenses above the fair market rental value of the home because it is such a large chunk of money. Want to see how it works?
Example
Let’s say you buy a home on January 1. Your regular monthly expenses will total $2,500 (use this calculator to figure regular expenses). However, if you were to rent out the home with everything in it and cover the utilities, you could get $3,500 a month. The fair market rental value of the home for the year is $42,000 ($3,500*12). You can’t claim any more than that.
Your normal expenses will cost $30,000 for the year ($2,500*12), so you can claim $12,000 ($42,000-$30,000) of your down payment as well. Any down payment that you pay in excess of $12,000 will have to come from taxable income. If you purchase a home mid-year, you will do all of the calculations on a prorated basis, just as you would if you simply changed homes mid-year without buying.
Other Considerations
I know that some people try to work around this by having a smaller down payment and higher monthly payments. That could make sense in some situations, but it isn’t a sure thing. You need to look at how much more you are paying in interest over the life of the loan, how much your interest rate is affected by the size of your down payment (which could lead to paying more in interest), and things like whether or not you will have to pay private mortgage insurance (PMI). All of those things could make it more financially beneficial to have a big down payment, even if it does not qualify for tax exemption as a housing allowance.
Remember, the housing allowance is just one tool (albeit a powerful one) in your financial toolbox whose purpose is to assist you in being a wise steward of that which God has entrusted to you. You must balance your use of the housing allowance, and the effort that you put into squeezing every last cent out of it, with the overall health of your finances and your relationship with money.
25 Responses
Kathie
December 16, 2020“If you’re planning to buy a home, you need to have your housing allowance changed BEFORE you make the purchase. It must be officially designated by your church or employing organization, so you need to make a request in advance. How far in advance depends upon how quickly they work.”
My husband recently retired. If we wanted to purchase a house withdraw the down payment money from a 403b, does the church need to designate an amount in advance?
This might be possible since the retirement was just a couple months ago, but down the road that may not be an option. How does a pastor withdraw funds from 403b accounts and follow the housing allowance rules?
Amy
December 19, 2020Kathie,
If the 403(b) is with a denominational provider, then they have the right to designate the housing allowance as if they were the church. Otherwise the church should do it but there’s no easy answer as to how. One option is to have all 403(b) withdrawals designated as housing allowance (the church could just say they designate it that way in perpetuity), then you just track what was used for non-housing and include that in your taxable income.
Ryan
December 27, 2020Thanks – just to clarify…does it matter this still apply if your down payment is coming from the sale of your last house? Seems like at least some of that money was paid tax-deductible under the housing allowance and then recounted when the house is sold and a new purchase made. Haven’t seen that particular aspect addressed.
Amy
December 28, 2020Ryan, technically all money designated as a housing allowance is being paid to you by your church for your services rendered, so it wouldn’t be coming from proceeds on the sale of a previous home. Perhaps you’re able to increase your housing allowance from the church for a down payment because you are using the proceeds from the sale to pay for your other living expenses that you usually cover with salary. The truth is that once the money is deposited into your bank account, it all gets mixed together and most people don’t track which dollar was named housing allowance and which was from the home sale.
Nechi Kale
May 1, 2021Hello Amy,
Thank you for the ministry of Pastor’s wallet. It has been an invaluable tool. Pls can you shed light on this;
If I sell my present house and buy a lot to construct a new home, can I use my housing allowance to cover the rent for temporary housing for my family during the construction AS WELL as payment for note on new construction since my designated housing allowance can cover both payments?
Once constriction is over and we move out of the temp rental, payment on that will cease and housing allowance will only be used for payment of monthly note for new construction.
Amy
May 6, 2021Nechi, I would recommend against that because it is akin to using the housing allowance for 2 homes at the same time, which the IRS frowns upon. It is not specifically forbidden in the law, but it has gone to court and the IRS won. It would be safest to only use the housing allowance for one home at a time, though you can choose whichever is more expensive.
K. Edwards
June 12, 2021Thanks for your ministry! I am an ordained pastor who was living overseas for 6 years. My wife and I leased out our primary residence when we moved overseas and continue leasing it and have been taking our housing allowance based on the expenses of the house since 2016 However, with COVID travel restrictions, we have been renting an apartment in the USA (temporarily) as visas are not available to return overseas. Can I still use the house expenses on the house we own for our housing allowance or can I only use the expenses on the apartment we rent as they are much lower than the actual expenses of the house due to the mortgage payments, etc.?
Amy
June 15, 2021That’s a tough question and there isn’t a clear answer on it from the IRS. The idea behind the housing allowance is that it is used to provide a home, which would be the place that you live regularly. However, it isn’t spelled out anywhere so you’ll just have to make a judgment call. With gray areas like this, I usually ask myself, “Could I defend this decision in tax court?”
Kj
August 20, 2021Question: is it possible for me to change hoising allowance amount through church (if church board permits) a month or two before purchasing home? Or so I have to wait till January 2022 to change the housing allowance amount?
Amy
August 22, 2021KJ, the IRS places no restrictions on this, so you can change your housing allowance whenever you want, as long as your specific church allows it.
Gary
November 23, 2021I am an ordained minister. Toward the end of each year, my employer (in consultation with me) designates a certain amount as housing allowance. In Jan 2021 I sold my house and bought another one of more or less equal value at the end of April. From February through most of April we lived with our son while we were looking for a house to buy. We paid him a minimal amount of rent. As a result of paying less on housing during these four months, the amount we are spending on housing this year is less than what was designated. Unless I can count (part of) the downpayment. Can I use part of the downpayment we made on the new house to make up the difference/ I need to make up about 3,500 dollars, and of course the down payment was much more than that. I just want to legitimately show that what I spent was equal to the amount designated beforehand. Thanks!
Amy
November 26, 2021Gary, yes, a down payment is a qualified expense so you can use it to make up the difference.
Walter
January 29, 2022Amy, thank you so very much for your informative articles and ministry to clergy and their families.
I’d like to change up the example you’ve used above. All applies except:
A downpayment of 20% ($100,000) is paid in on July 1st.
What would that look like? I wish I could time everything for the top of the year.
Amy
January 31, 2022Walter, you would do the calculations the same but with two different house values and only accounting for 6 months for each. For example, if the fair market rental value of the first home is $3,500 but you move into a nicer home mid-year that is worth $4,000 per month, then the total fair market rental value for the year is $45,000 ($3,500*6+$4,000*6). Then you would add up your non-down-payment expenses and the difference between that and $45,000 is the amount of your down payment that you could claim.
Mark Hudelson
February 17, 2022Amy, I’ve seen in various places that “the complete cost of the home” can qualify for the housing allowance. I was curious if that would include home inspection fees since most banks require that to get a loan in the first place?
Amy
February 23, 2022Mark, I think home inspection fees would definitely qualify for the housing allowance.
Jackson
May 9, 2022Hi
I have a question. I am planning to buy a house though government help which allows you to get a loan based on your income. When I report my income to them, do I include my housing allowing? Or do I just state my monthly income without it?
Amy
May 13, 2022Jackson, each government program calculates income differently and some include the housing allowance while others don’t. If they want you to take your income from your tax return, Form 1040, then that would not include the housing allowance.
Jackson
January 25, 2023Thank you so much Amy for your response.
Victor
November 17, 2022Amy, I have a question. I currently rent and receive $2200/month for MHA, and some salary in addition to that. However, I plan on buying a condo in cash for $500,000 in January. How much can I receive as MHA for next year? I’ll have HOA fees, property tax, and a few things like that, but obviously no mortgage since I purchased it without a loan. Thanks for the help!
Caleb
January 2, 2023Hi!
In 2022 we rented a house for the entirety of the year but bought land in July for a new home build that we will start this year (2023). Can I use the down payment for the land and the subsequent mortgage payments as qualified clergy housing expenses?
Thanks!
Jade
March 12, 2024Hi Amy,
I just turned 55 and no longer work for the church I was wondering if I could us my parsonage to purchase a home. Can I pay for a home outright if my funds are sufficient? Or what is the maximum down payment I can put down for a home purchase. I called our Brokerage and they did not say there was a limit but I want to double check before I do anything. I’ve heard people getting into nightmare situation because they didn’t double check. If I buy mid year is this possible? If I move to another home when my husband retires will we be able to us our parsonage again?
Amy
March 15, 2024Jade, any parsonage allowance the church pays you only counts towards expenses you incur in that tax year. Thus, if you stop working there in February and purchase a house in March, then you can use those funds towards the house purchase. However, if you stop working there in December you cannot use those funds the following year. Any retirement funds that you have saved into a church retirement plan from your ministerial services can be taken out as an allowance while you are retired.
The maximum amount of your down payment will depend on the fair market rental value of your home. If you buy a home on July 1 with a $100k down payment and the fair market rental value of the furnished home is $5k/month, then you are limited to a $30k allowance ($5k * 6 months) and the other $70k of your down payment would not be eligible for the allowance.
If you buy a house this year and then another one several years later, that is fine but all of this still applies. The big thing to know is that you can only claim the allowance on 1 house at a time.