Taxability of Employer-Provided Housing
Not-For-Profit Advisor, 2007 Fall

It is not uncommon for tax-exempt organizations, primarily educational institutions, to provide housing to certain faculty, staff, or support personnel. Many organizations believe that the value of this housing is automatically excluded from the recipient’s income; however, there are several tests that must be met for this treatment to result.

In order for the value of lodging furnished by an employer to be excluded from an employee’s income, the following three tests must be met:

1. The lodging must be furnished for the convenience of the employer.
2. The employee must be required to accept the lodging as a condition of employment.
3. The lodging must be furnished on the business premises of the employer.

The first two conditions are commonly described in tandem, and require a direct connection between the lodging and the employer’s business interests; in addition, the employee must be required to accept the lodging in order to properly perform his or her duties. There are numerous cases and rulings describing when these two tests are met. For example, lodging furnished to an employee who was required to be available for duty at all times has been held to meet these tests. This requirement, however, is examined based on the nature of the position involved. For example, in Winchell v. United States, a college president who was sometimes called to the main campus after hours to handle security issues, and only occasionally entertained potential donors and hosted events at his college-furnished residence, was found to not meet the first two conditions. The court felt that the use of the residence for business purposes and the need for the president’s services after hours were too nominal to support these requirements.

The third prong, that lodging must be furnished on the business premises of the employer, is also somewhat subjective. The typical analysis of this issue involves a determination of whether the residence constitutes an integral part of the organization’s business property, or premises on which the organization carries on a significant portion of its business. Both the employee’s duties and the nature of the organization’s business are considered in this analysis.

If these tests cannot be met, the value of the housing, reduced by any amounts paid by the employee for the housing, will be considered taxable wages to the employee. Qualified educational institutions, however, have a special exception that allows them to limit the amount that is taxed to the employee. If the housing is “qualified campus lodging,” its value is excluded from the employee’s income if the employee pays rent equal to the lesser of (1) 5 percent of the appraised value of the housing, or (2) the average of rentals paid to the institution by individuals who are not employees or students for comparable housing. Even if the employee pays no rent, the maximum taxable amount is 5 percent of the value of the lodging.

Qualified campus lodging is lodging that is located on, or in the proximity of, the campus of a qualified educational institution, and which is provided to an employee, his or her spouse, and any dependents for use as a residence.

If you need assistance analyzing your organization’s specific situation, please contact your Plante & Moran representative.