Federal Income Tax Treatment for Head of School Housing

Recent increases in real estate prices have made the taxation of head housing more consequential. Federal tax law provides significant incentives for certain school provided housing arrangements. There are also practical incentives for a school to provide housing for its head, including the ability to recruit for the position from a national talent-pool without being disadvantaged by regional housing-cost differences.

Conditions for housing benefit to be exempt from federal income tax:

Internal Revenue Code section 119 provides that housing furnished to a head may be excluded from the head’s gross federal income only if the following conditions are satisfied:

1.      The housing is located on the business premises of the school;

2.      The housing is provided for the convenience of the school;

3.      The housing is provided as a condition of the head’s employment;

4.      The housing is provided to the head in-kind.

To satisfy the convenience and condition of employment tests, there must be a direct relationship between the housing, the educational interests of the school, and the responsibilities of the head.

For housing to be provided in-kind by the school, the housing must be procured by the school. If the head were provided a cash allowance or reimbursement for procuring housing from a third-party, such payments would not be in-kind and would represent taxable compensation for federal income tax purposes.

5% rent alternative for school owned housing:

If school provided housing does not meet the above-mentioned conditions, but the school nevertheless owns housing in the proximity of the school and rents it to its head, the value of the housing may be excluded from the head’s gross income, provided that adequate rent is paid to the school by the head. Rent is considered “inadequate” if it is less than the lesser of: (a) 5% of the appraised value of the property being rented, or (b) the average of annual rents for comparable properties. Although in this case a head would pay rent to the school for their housing, some portion of the housing may still represent a federal income tax-free benefit.