A common method for determining the fair rental value of clergy housing is using a fixed percentage, like 12%-15% of the current home value. However, this method may be inaccurate. The IRS and tax courts typically recommend using methods such as the comparable fair rental value or the comparable sales method from a third party to determine the fair rental value limitation.

To determine the fair rental value of a home, including furnishings and appurtenances such as a garage, plus the cost of utilities under IRC § 107, follow these detailed guidelines and methods:

Fair Rental Value of the Home:

1. • Comparable Market Analysis: The home’s fair rental value (FRV) can be determined by comparing it to similar properties in the same area. This involves looking at rental listings for homes with comparable sizes, conditions, locations, and amenities. Real estate websites, local agents, or rental market reports can provide this information.
   • Professional Appraisal: Hiring a professional appraiser to assess the property’s rental value can provide a precise and defensible FRV. The appraiser will consider factors such as the size of the home, the number of bedrooms and bathrooms, the condition of the property, and its location.
   • Rental Income Approach: If the home has been rented out previously, the historical rental income can be used to determine the FRV, adjusted for any changes in the rental market or property condition.
2. Furnishings and Appurtenances:
   • Furnishings: The value of furnishings should be added to the FRV of the home. This can be done by estimating the rental value of the furnishings separately. For example, if the house is fully furnished, you can look at the additional cost of renting a furnished home versus an unfurnished one in the same area.
   • Appurtenances (e.g., Garage): The rental value of appurtenances such as a garage should also be included. This can be estimated by comparing the rental rates of homes with and without such features. If the garage is rented separately, its rental value can be directly added to the home’s FRV.
3. Cost of Utilities:
   • Utility Bills: Collect the utility bills for the home, including electricity, water, gas, and any other utilities. Add the total annual cost of these utilities to the FRV.
   • Average Utility Costs: If actual utility bills are unavailable, you can estimate the utility costs based on average utility expenses for similar homes in the area. Utility companies or local government websites often provide average utility costs for different types of homes.

Still, have questions?
Contact Pro Advisor Support to answer your questions.

Clergy Financial Resources
Tax I Payroll I Bookkeeping I HR | Consulting
11214 86th Avenue N.
Maple Grove, MN 55369

Tel: (888) 421.0101
Fax: (888) 876.5101

Clergy Financial Resources serves as a resource for clients to help analyze the complexity of clergy tax law, church payroll & HR issues. Our professionals are committed to helping clients stay informed about tax news, developments and trends in various specialty areas.

This article is intended to provide readers with guidance in tax matters. The article does not constitute, and should not be treated as professional advice regarding the use of any particular tax technique. Every effort has been made to assure the accuracy of the information. Clergy Financial Resources and the author do not assume responsibility for any individual’s reliance upon the information provided in the article. Readers should independently verify all information before applying it to a particular fact situation, and should independently determine the impact of any particular tax planning technique. If you are seeking legal advice, you are encouraged to consult an attorney.

For more information or if you need additional assistance, please use the contact information below.

Clergy Financial Resources
11214 86th Avenue N.
Maple Grove, MN 55369

Tel: (888) 421-0101 
Fax: (888) 876-5101
Email: clientservices@clergyfinancial.com