Parsonage

A parsonage (also called a manse or rectory, depending on the denomination) is a church-owned residence provided to a minister rent-free as part of their compensation package. Under IRC Section 107(1), the fair rental value of the parsonage — including furnishings and utilities paid by the church — is excluded from the minister's federal income tax.

This is the original form of the clergy housing benefit, predating the cash housing allowance. In earlier eras, most churches owned a home next to or near the church building where the pastor lived. Today, church-owned parsonages are less common (many churches prefer to pay a housing allowance so ministers can build equity in their own homes), but they're still used, particularly in rural areas, smaller churches, and certain denominations.

When a church provides a parsonage, the minister doesn't report the fair rental value as income for federal income tax purposes. However, like the housing allowance, the fair rental value of the parsonage is still subject to self-employment tax. The church typically pays for major expenses (mortgage, insurance, property taxes, major repairs), while the arrangement for utilities and minor expenses varies. Any portion of expenses the minister pays out of pocket may be eligible for a supplemental housing allowance designation.

For churches that own a parsonage, understanding the tax treatment is essential for both the church and the minister. The church needs to maintain the property, budget for repairs and upkeep, and understand that the parsonage is part of the minister's total compensation — even though no cash changes hands for housing. When the minister eventually retires or moves on, the housing transition can be challenging — they may have no home equity after years of living in church-owned housing. Some churches address this by contributing to a housing equity fund for the minister alongside the parsonage benefit. Others are transitioning away from parsonages for this reason.