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At a time when some politicians are calling for an end of the home mortgage interest deduction, there is a class of California taxpayers who do not have to worry about taxes on their homes at all. An old provision in the tax code provides that clergy members get to live tax-free in homes that are wholly owned by their churches.

“For most of them the housing allowance is modest because their compensation is modest,” says a church attorney. “The housing allowance is critically important for making ends meet-it is not a luxury,” another church affiliated attorney said.

However this “parsonage deduction” has drawn severe criticism recently because it applies even to palatial mansions and the tax court recently expanded the deduction to include multiple homes.

“It’s fair to question why a clergy member needs a tax-free allowance for more than one home, and whether tax-exempt churches should subsidize millionaire ministers,” said Senator Charles Grassley, a member of the Senate Finance Committee.

The recent tax court decision involved a trumpet playing minister who lives in an 18,280 square-foot lakefront mansion that sits on 25 acres. He was accused of tax evasion and served a year in jail, but part of the case was given to the tax court because prosecutors said that the minister evaded taxes related to his second home.

The tax court said that the law is not very clear and that it allows for a clergyman to live in multiple church-owned homes tax free. There is also no limit on the value of the home for the purposes of the exemption, but the annual payment to buy or rent the home cannot exceed the rental value of the home.

Source: The Wall Street Journal, “Tax Break for Clergy Questioned,” Laura Saunders, Aug. 23, 2011