A church can rent out its parsonage to someone other than a minister, but the decision brings property tax, federal income tax, fair housing, zoning, and landlord-law consequences that need to be worked through before the lease is signed. A mortgage-free parsonage producing modest rent can be a sensible use of an otherwise vacant building. A mortgaged parsonage, or one in a jurisdiction that pulls the tax exemption the moment a non-minister moves in, can produce less income than the trouble is worth. The math only works once you know what changes.
Property Tax Exemption Comes First
Church-owned property is generally exempt from local property taxes because it serves a religious or charitable purpose. A parsonage housing the pastor qualifies. A parsonage rented to a third party often does not. When the local assessor determines the property is being used commercially, it can revoke the exemption and add the parsonage to the tax rolls.
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 with anyone, 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? The resulting tax bill can be large enough to wipe out the rental income, and getting that number first is the only way to know whether the rental works financially.
Federal Income Tax on the Rent
Here most churches get a pleasant surprise. If the parsonage is owned free and clear, the rental income is generally not subject to federal income tax. Under Section 512(b)(3), rents from real property are excluded from unrelated business taxable income.1Office 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 UBIT on that income.
The picture changes when the church still carries a mortgage. Section 514 treats rental income from debt-financed property as partly taxable. The taxable share equals the average outstanding mortgage balance divided by the average adjusted basis of the property during the tax year.2Office 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%.3Office of the Law Revision Counsel. 26 US Code 511 – Imposition of Tax on Unrelated Business Income
Churches owing UBIT on debt-financed rent can deduct expenses connected to the property in the same debt-to-basis proportion. Eligible deductions include mortgage interest, insurance premiums, repair costs, and depreciation calculated by the straight-line method only.4Internal Revenue Service. Publication 598 – Tax on Unrelated Business Income of Exempt Organizations A flat $1,000 specific deduction also applies regardless of actual expenses.1Office of the Law Revision Counsel. 26 US Code 512 – Unrelated Business Taxable Income
Any church with $1,000 or more in gross income from a regularly conducted unrelated trade or business must file Form 990-T.5Internal Revenue Service. 2025 Instructions for Form 990-T This obligation exists even though churches are otherwise exempt from most IRS filing requirements. If the expected UBIT liability for the year reaches $500 or more, the church must also make quarterly estimated tax payments.6Internal Revenue Service. Estimated Tax – Unrelated Business Income
What the Minister Loses
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 as part of compensation, the fair rental value is excluded from the minister’s gross income.7Office of the Law Revision Counsel. 26 USC 107 – Rental Value of Parsonages Once the church rents the property to someone else, that exclusion disappears because no minister is living there.
If the church still employs a minister who now needs to find housing elsewhere, it can designate part of the minister’s salary as a cash housing allowance under §107(2). The rules change. A cash allowance is excludable only up to the smallest of three amounts: the amount the church officially designates in advance, the amount the minister actually spends on housing, or the fair rental value of the home including furnishings and utilities.8Internal Revenue Service. Ministers Compensation and Housing Allowance The designation must happen in writing before the first payment, not retroactively.
Fair Housing Applies the Moment You Become a Landlord
Once the church rents to the public, the Fair Housing Act applies. The church cannot refuse to rent based on race, color, national origin, sex, familial status, or disability. A narrow religious exemption lets a religious organization limit rental of dwellings it owns to persons of the same religion, but only if two conditions are met: the rental is for a non-commercial purpose, and membership in the religion is not restricted by race, color, or national origin.9Office of the Law Revision Counsel. 42 USC 3607 – Religious Organization or Private Club Exemption
That non-commercial requirement is the catch. A church renting a parsonage at market rate to generate revenue is engaged in a commercial activity, which likely disqualifies it from the §3607 exemption. Any church receiving HUD funding or other federal housing dollars cannot use the exemption at all. A congregation that wants to give preference to its own members should consult an attorney before advertising the unit; a misstep exposes the church to a federal discrimination complaint.
Zoning and Permitted Use
The church also needs to confirm that local zoning allows residential rental on the property. Religious buildings often sit in zones that permit worship but restrict or prohibit commercial activity. Some municipalities classify a third-party rental as a change in use, which can require a variance or special permit. Others treat a single-family rental the same as any residential occupancy and impose no additional requirements.
Churches sometimes assume that the Religious Land Use and Institutionalized Persons Act (RLUIPA) shields them from zoning restrictions. 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 Compliance with the zoning code has to stand on its own.
Landlord Duties the Church Now Owes
Churches stepping into the landlord role take on every obligation that comes with it. State and local landlord-tenant laws do not carve out exceptions for religious organizations. The church must keep the property habitable, which at a minimum means functioning heat, clean water, working plumbing, safe electrical systems, and a structurally sound building. Failing those standards can lead to lawsuits, rent withholding, or code enforcement.
Required Disclosures
Two federal disclosure rules apply to almost every church rental. If the parsonage was built before 1978, the church must disclose any known lead-based paint hazards and provide the tenant with the 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 Many parsonages are older homes, so this comes up often. The church must also share any available inspection reports about lead paint in the building.
If the church runs a credit or background check on a prospective tenant 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 must identify the reporting agency, state that 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
The Lease
Use a written residential lease. It should cover the rental term, monthly rent, security deposit amount and conditions for its return, which party handles maintenance and repairs, and rules about occupancy. Many states cap security deposit amounts and set deadlines for returning deposits after move-out, so a state-specific lease template drafted or reviewed by an attorney is worth the cost. A generic form from the internet may omit protections the church needs or violate state landlord-tenant requirements.
Internal Approval and Insurance
Church leaders usually cannot decide to rent the parsonage on their own authority. Most church bylaws 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 lands on the general fund with no insurer behind it. The cost of landlord coverage is modest compared to the exposure it eliminates.