Yes, a church can rent out its parsonage to a non-minister, but the decision sets off a chain of tax, insurance, zoning, and landlord-law consequences that need to be worked through before a lease is signed. A vacant parsonage looks like easy income, and it can be, especially when the property is owned free and clear. What changes the moment a third-party tenant moves in is almost everything else.
The Minister’s Housing Exclusion Goes Away
The parsonage exists in federal tax law for one purpose: housing a minister. Under Internal Revenue Code Section 107, when a church provides a home to a minister of the gospel as part of compensation, the fair rental value of that home is excluded from the minister’s gross income.1Office of the Law Revision Counsel. 26 USC 107 – Rental Value of Parsonages Once the church rents the property to someone else, that exclusion disappears. No minister lives there.
If the church still employs a minister who now has to find housing elsewhere, it can designate part of the minister’s salary as a cash housing allowance under §107(2). The rules are tighter. A cash allowance is only excludable up to the smallest of three amounts: the amount the church designates in advance, the amount the minister actually spends on housing, or the fair rental value of the home including furnishings and utilities.2Internal Revenue Service. Ministers Compensation and Housing Allowance The designation has to be formal and in place before the first paycheck it applies to. Retroactive designations do not work.
The Property Tax Exemption Is at Risk
Church-owned property is generally exempt from local property taxes, but the exemption hinges on the property serving a religious or charitable purpose. A parsonage housing the pastor qualifies. A parsonage generating rental income from a third-party tenant often does not. When the local assessor determines the property is being used commercially, the exemption can be revoked and the parsonage added to the tax rolls.
The resulting bill can be large enough to wipe out the rental income. Rules vary widely by jurisdiction. Some localities allow a brief gap between ministers without pulling the exemption, treating it as a temporary vacancy. Others revoke the exemption as soon as a non-minister occupies the property. A few apply a proportional approach, taxing only the portion used for non-exempt purposes.
Before signing a lease, the church treasurer should call the local assessor’s office and ask two questions: will renting the parsonage trigger property taxes, and if so, what will the assessed value be? That number is the only way to know whether the rental math actually works.
Federal Tax on the Rental Income
Here is where most churches get a pleasant surprise. If the parsonage is owned free and clear, rental income from it is generally not subject to federal income tax at all. Under Section 512(b)(3), rents from real property are excluded from unrelated business taxable income.3Office of the Law Revision Counsel. 26 US Code 512 – Unrelated Business Taxable Income A church collecting $1,500 a month on a mortgage-free parsonage owes no unrelated business income tax on that money.
The picture changes when the church still carries a mortgage. Section 514 treats rental income from debt-financed property differently. The taxable portion equals the debt-to-basis percentage: the average outstanding mortgage balance divided by the average adjusted basis of the property during the tax year. If a parsonage has an adjusted basis of $200,000 and an average mortgage balance of $120,000, 60% of the net rental income is subject to UBIT.4Office of the Law Revision Counsel. 26 US Code 514 – Unrelated Debt-Financed Income The tax on that portion is calculated at the corporate rate under Section 11, currently 21%.5Office of the Law Revision Counsel. 26 US Code 511 – Imposition of Tax on Unrelated Business Income
Offsetting the Tax
Churches owing UBIT on debt-financed rental income can deduct expenses directly connected to the property, but only in the same debt-to-basis proportion. If 60% of the income is taxable, then 60% of eligible expenses can offset it. Deductible costs include mortgage interest, insurance premiums, repairs, and depreciation, and depreciation has to use the straight-line method.6Internal Revenue Service. Publication 598 – Tax on Unrelated Business Income of Exempt Organizations
Filing Form 990-T
Any church with $1,000 or more in gross income from a regularly conducted unrelated trade or business must file Form 990-T, the Exempt Organization Business Income Tax Return.7Internal Revenue Service. 2025 Instructions for Form 990-T That obligation applies even though churches are otherwise exempt from most IRS filings. If the expected UBIT liability for the year is $500 or more, the church also has to make quarterly estimated tax payments.8Internal Revenue Service. Estimated Tax – Unrelated Business Income
Fair Housing Applies the Day You Become a Landlord
Once the church rents to a third party, the Fair Housing Act applies. The church cannot refuse to rent based on race, color, national origin, sex, familial status, or disability. There is a narrow religious exemption: a religious organization may limit rental of dwellings it owns to persons of the same religion, but only if the rental is for a non-commercial purpose and the religion’s membership is not restricted by race, color, or national origin.9Office of the Law Revision Counsel. 42 USC 3607 – Religious Organization or Private Club Exemption
The “non-commercial purpose” requirement is the sticking point. A church renting a parsonage at market rate to generate revenue is engaging in a commercial activity, which likely disqualifies it from the §3607 exemption. Churches that want to give preference to members of their congregation should consult an attorney before advertising the unit. A church receiving HUD funding or other federal housing dollars cannot use the religious exemption at all.
Zoning and What RLUIPA Won’t Do
Local zoning has to permit residential rental on the property. Religious buildings often sit in zones that allow worship but restrict commercial activity. Some municipalities classify a third-party rental as a change in use requiring a variance or special permit. Others treat a single-family rental the same as any residential occupancy and impose nothing extra.
Churches sometimes assume that the Religious Land Use and Institutionalized Persons Act shields them from zoning restrictions on their property. RLUIPA prevents zoning laws from imposing a substantial burden on religious exercise, but renting a house for income is not religious exercise.10Department of Justice. Religious Land Use and Institutionalized Persons Act Courts have denied RLUIPA claims when religious institutions sought to operate commercial ventures on their property.11Department of Justice. RLUIPA Q and As – Statement of the Department of Justice on the Land Use Provisions of RLUIPA The church has to comply with the zoning code on its own merits.
Landlord Duties the Church Now Owns
State and local landlord-tenant laws do not carve out exceptions for religious organizations. The church has to maintain the property in habitable condition, which at minimum means functioning heat, clean water, working plumbing, safe electrical systems, and a structurally sound building. Falling short can expose the church to lawsuits, rent withholding, or code enforcement.
Required Disclosures
Two federal disclosure rules apply to almost every church renting a home. If the parsonage was built before 1978, the church must disclose any known lead-based paint hazards and provide the tenant a federally approved pamphlet on lead poisoning prevention before the lease is signed.12Office of the Law Revision Counsel. 42 US Code 4852d – Disclosure of Information Concerning Lead Upon Transfer of Residential Property Any inspection reports or records about lead paint also have to be shared. Many parsonages are older homes, so this comes up frequently.
If the church runs a credit or background check on an applicant and then denies the application, charges higher rent, or requires a larger deposit based even partly on that report, federal law requires an adverse action notice. The notice has to identify the reporting agency, tell the applicant the agency did not make the decision, and explain the applicant’s right to dispute inaccuracies and obtain a free copy of the report within 60 days.13Federal Trade Commission. Using Consumer Reports – What Landlords Need to Know
Use a Written Lease
The church should use a written residential lease, not a handshake. It should cover the rental term, monthly rent, the security deposit amount and conditions for its return, which party handles maintenance and repairs, and occupancy rules. Many states cap security deposits and set deadlines for returning them after move-out. A state-specific lease drafted or reviewed by an attorney is worth the cost; a generic form downloaded from the internet may omit protections the church needs or violate state-specific requirements.
Internal Approval and Insurance
Church leaders cannot decide to rent the parsonage on their own authority. Most church bylaws or constitutions specify how property decisions are made, and renting real estate almost always qualifies. Depending on the denomination and governance structure, approval might require a vote from the board of trustees, the church council, or the full congregation. Skipping this step can make the lease voidable if a member later challenges whether leadership had authority to sign it.
Insurance is the piece most churches overlook. A standard house-of-worship policy covers the building for church activities and may cover a vacant parsonage, but it almost certainly does not cover a tenant living there. The church needs to contact its insurer and add a landlord or rental dwelling endorsement, which covers liability if the tenant or a guest is injured on the property and protects the structure against tenant-caused damage. Without that endorsement, a slip-and-fall claim from a tenant could land on the church’s general fund with no insurer behind it. The cost of landlord coverage is small compared to the exposure it removes.