How to Figure Fair Rental Value

Figuring your fair rental value (FRV) is an essential part of claiming a housing allowance as the federal income tax exclusion is limited to the lesser of:

1. The amount actually spent on eligible housing expenses.
2. The fair market rental value, including furnishings and appurtenances such as a garage, plus furnishings and utilities.
3. The amount officially designated in advance as housing allowance.

Of the 3 above conditions, figuring the FRV of their home is the area that confuses most ministers.

Also...ministers that live in a church provide parsonage must know how to determine the FRV of the parsonage, as they are required to add in the FRV of the parsonage when figuring their self-employment tax.

So I am excited to be able to share the following article written by Ray Wallace, tax return specialist and founder of Wallace & Holland Company, Inc.

Figuring Fair Rental Value (FRV)

It seems we have had a few Pastors this past year who have asked us questions regarding how they would figure out the Fair Rental Value (FRV) plus the Cost of Utilities. 

The IRS doesn’t go into detail explaining how you should figure this out. However, they have accepted this explanation. 

The FRV of your home or parsonage, whether it is provided by the church, owned by the Pastor or it is rented by the Pastor, is what the square footage the home or apartment would rent for in the community that you live plus the rental value of all the furnishing within that home or apartment. 

It is recommended that the Pastor contact a licensed realtor within the community and request a fair rental cost for a similar home or apartment. Then the Pastor should seek out the fair rental value for all the furnishing within the home. 

A method that has been used in the past is the percentage method.

• The pastor would take the average cost to purchase all the furnishings including appliances, then use 20% of that cost as the FRV.
• The Cost of Utilities is figured by using the actual cost of those utilities for that home or apartment for the year.

Fair Rental Value Examples

Example A: 

Pastor Dan and his wife own their 6 room home. They pay their own utilities ($2,700), insurance ($650), maintenance & repairs ($1,200) and real estate taxes ($3,500). They also have a mortgage and pay $1,050 per month for principal and interest ($12,500).

A total out of pocket cost to own and maintain the house is $20,650 for the year.  They have furnishings and appliances in the home that have a replacement value of $25,000.

They ask a local realtor provide to provide them with local comparisons for a totally furnished like property would rent for in their community. (Comment: a landlord who was renting this totally furnished property would be looking to make an annual profit of at least 20% over cost.) 

Example B: 

Pastor Dan and his wife live in the 6 room parsonage that the church supplies. The only out of pocket cost that they pay for is renters insurance on their own furnishings ($900). Their furnishings have a replacement value of $18,000. The church supplies everything else. 

Like in Example A; they will need to contact a local realtor to provide them with Fair Rental comparisons for a totally furnished like property. The Realtor says the annual rent with furnishings would be $21,600 and the church provides them with the actual utility costs of $2,700  A total of $20,700.

About the Author:

Raymond A. Wallace is the founder of Wallace & Holland Company, Inc. (WH), an Accountant for over 40 years & Registered Tax Return Preparer with the IRS, serving clergy and churches, Christian organizations such as the Interdenominational Christian Men’s Network and the New England Seafarers Mission as their treasurer for 15 years and followers of Jesus Christ.

He may be contacted via Wallace & Holland Company website or at 508-584-5544.