Employer-provided housing: What’s taxable and what’s not?

Employers may provide housing to employees for a variety of reasons, including not-for-profit organizations that maintain institutions of higher education, historic sites, housing facilities, and other premises that require on-site staff. Unless an exception applies, the full value of the housing is treated as additional taxable compensation to the employee. Full or partial exceptions apply if the housing is:

• Provided for the convenience of the employer
• A temporary work location
• Lodging furnished by an educational institution

Let’s take a closer look at these exceptions.

Convenience of the employer

To take advantage of this exception, certain rules must be met, and the rules are narrower than you may think. The lodging must meet the following requirements:

• It is provided for the convenience of the employer. A written statement in the employment contract is not sufficient to meet this test. For the housing to qualify, there must be a direct nexus between the lodging furnished and the business interests of the employer.
• It is required as a condition of employment. The employee must accept the lodging to properly perform the duties of employment, and he or she cannot have an option to accept cash in lieu of the lodging. Examples include lodging furnished because the employee is required to be available for duty at all times or because the employee would not be able to perform the service without the lodging.
• It is furnished on the business premises of the employer. Business premises is generally defined as the place of employment. Mere ownership of the premises by the employer is not sufficient. Courts have ruled that the lodging needs to be living quarters that constitute an integral part of the employer’s business property — for example, geographically integrated within a campus or above an organization’s location of charitable activities — or on the premises where the employer conducts a significant portion of its business, such as a residence off-site from the main location but where significant charitable activities are conducted. A special provision in the tax code also qualifies certain lodging furnished in a camp in a foreign country by or on behalf of the employer as exempt lodging.

It’s important the employer’s file includes documentation to defend the nontaxable treatment of the lodging. This file may contain a description of the employee’s responsibilities, a description of the lodging being furnished, reasons why the lodging is required for the employee to perform his or her duties, the employment contract, and a listing of taxable or nontaxable utilities and services provided (such as phone, Internet, cleaning services, and landscaping services). If the lodging is not located on the main business premises, a calendar of events and a log of business use of the residence should be maintained to support that significant business activities are conducted at the residence.

Temporary work locations

In some cases, an organization will cover housing costs for an employee for a temporary assignment or project outside his or her normal work area. To qualify for the temporary work location exception, several factors come into play:

• The employee must be traveling away from his or her tax home (see below), which is the individual’s regular place of business, regardless of where he or she maintains a family home. This includes the entire city or general area in which the business or work is located.
• The assignment must be temporary (one year or less). If the assignment is indefinite or expected to last more than one year, the employee’s tax home changes to the new location and lodging costs paid by the employer will be taxable unless another exception is met.

If the employee has more than one place of work, the “main place” or “tax home” can be identified based on hours, level of activity, and source of income at each location. For example, say a person lives in Cincinnati and holds a seasonal job for eight months each year, earning $40,000. She works the other four months in Miami, also at a seasonal job, and earn $15,000. The main place of work — and therefore her tax home — is Cincinnati under the hours and income test.

Based on these rules, if a person is hired for an indefinite period of time and chooses to keep a family residence in another city — such as a person who relocates from Phoenix to New York for a job, but chooses to keep the family home in Phoenix until the end of the school year — lodging paid for by the employer in the new work location will generally not qualify for tax-free treatment. However, if the person is hired for a specific project, can prove his or her tax home remains in the original city (Phoenix), and the project is expected to last less than one year, the lodging may qualify for tax-free reimbursement under the organization’s accountable plan.

See IRS Publication 463 for more information and examples for temporary work locations and travel expenses.

Lodging furnished by educational institutions

For educational institutions or academic health centers that provide free or discounted rent, the tax code allows an exemption for the value of qualified campus lodging for amounts in excess of the lesser of:

• Five percent of the appraised value of the qualified campus lodging
• The average rent paid by individuals for lodging provided by the institution (other than lodging provided to employees or students) during the year for comparable lodging — in other words, the fair market value of residential rental space

For example, say a college owns rental properties on and near campus and has a policy that provides a discounted rental rate for college employees. Renters not employed by the college are charged full market rates. The college property managers determine that a rental unit of 1,200 square feet would rent at market value for $2,000 per month ($24,000 per year). Assuming the appraised value of the home as of July 1 is $400,000, 5% of the appraised value in this scenario would be $20,000. The lesser of these two amounts is $20,000 for the year, so if a faculty member pays the college $1,000 per month in rent for the property ($12,000 per year), the additional noncash compensation for that faculty member would be $8,000 per year ($20,000 minus $12,000). The additional $4,000 of value (the $24,000 full-market rental rate less $20,000, which is 5% of the appraised value) is a nontaxable benefit that is excluded from taxable income.