MINISTERS WHO RECEIVE PARSONAGE ALLOWANCE MAY DEDUCT MORTGAGE INTEREST AND PROPERTY TAXES

Rev. Rul. 85-96 ¹

Rev. Rul. 83-3, 1983-1 C.B. 72, holds, in part, that a minister may not deduct interest and property taxes that are allocable to a rental allowance excluded from gross income under section 107 of the Internal Revenue Code. This holding is based on section 265(l) of the Code, which provides, in part, that no deduction is allowed for any amount that is otherwise deductible but that is allocable to one or more classes of income (other than interest) wholly exempt from income tax. Section 7805(b) of the Code grants the discretion for any revenue ruling to be applied without retroactive effect. Under the authority contained in section 7805(b), Rev. Rul. 83-3 states that if a minister owned and occupied a home before January 3, 1983 (or before January 3, 1983, had a contract to purchase a home and subsequently owns and occupies that home), there will be no disallowance of deductions for interest and property taxes until the earlier of the date on which the minister no longer occupies the home or January 1, 1985.

Section 1052 of the Tax Reform Act of 1984, Pub. L. 98-369, provides that with respect to any mortgage interest or real property tax costs paid or incurred before January 1, 1986, by any minister of the gospel who owned and occupied a home before January 3, 1983 (or had a contract to purchase a home before such date and subsequently owned and occupied such home), the application of section 265(l) of the Code to such costs will be determined without regard to Rev. Rul. 83-3 (and without regard to any other regulation, ruling, or decision reaching the same result, or a result similar to the result, set forth in Rev. Rul. 83-3).

The Internal Revenue Service has decided, under the authority of section 7805(b), to grant further relief to taxpayers who may have relied on Rev. Rul. 62-212, 1962-2 C.B. 41, which was revoked by Rev. Rul. 83-3. Accordingly, deductions for mortgage interest and real property tax costs will not be disallowed under Rev. Rul. 83-3 if such costs are paid or incurred before January 1, 1987, and if section 1052 of the Tax Reform Act of 1984 would have applied to those costs had they been paid or incurred before January 1, 1986.

HOLDING

The second sentence of the next-to-the-last paragraph of Rev. Rul. 83-3 is amended to read as follows:

Further, if the minister described in Situation 2 owned and occupied a home before January 2, 1983, (or had a contract to purchase a home before January 3, 1983, and subsequently owns and occupies that home), the revenue ruling will not be applied to that minister so as to disallow deductions for mortgage interest or real property tax costs paid or incurred before January 1, 1987, or before such date as the minister ceases to occupy that home, whichever is earlier.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 83-3 is hereby modified.

¹ Also released as News Release IR-85-63, dated July 2, 1985.