Tax on Employer-Provided Housing and Lodging

1. Employers’ Convenience

As an employer, you can exclude the value of housing you provide to an employee from her taxable income if the lodging meets the following three conditions:

a. The employer must furnish the lodging on its business premises.

Business premises is generally defined as the place of employment. Unfortunately, your mere ownership of the premises is not sufficient. Courts have ruled that the lodging needs to be living quarters that constitute an integral part of your business property. 

Example

Employer-provided housing and lodging must be geographically integrated within a campus. Additionally, it could also be above an organization’s location of charitable activities. Furthermore, it could also be 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.

b. The lodging must be furnished for the convenience of the employer.

For employer-provided housing and lodging to be exempt from taxation, the employer must have a valid business purpose for providing housing beyond giving the employee additional compensation. 

Example

If the employer’s work site is located a substantial distance from other housing options, the IRS would likely conclude that the employer is providing the lodging for the convenience of the employee. Unfortunately, a written statement in the employment contract is not sufficient to meet this test. For the housing to qualify, therefore, there must be a direct relationship between the lodging furnished and the business interests of the employer.

c. The employee must accept the lodging to properly perform the duties of employment.

He or she cannot have an option to accept cash in lieu of the lodging. Therefore, the employer-provided housing and lodging is only exempt from taxation if the employee cannot have the option of accepting or declining 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.

Example

Judy works for Hope Medical Center. Hope, the employer gives Judy the choice of living at the hospital free of charge or living elsewhere and receiving a cash allowance. This cash allowance is in addition to her regular salary. If Judy chooses to live at the hospital, the hospital cannot exclude the value of the lodging from her wages.  Why?

Because she is not required to live at the hospital to properly perform the duties of her employment. If any of these conditions are not met, the employer must include the net value of the lodging on the employee’s W-2 form. Subsequently, the employee must report that amount as income on his or her tax return.

2. 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. For the employer-provided housing and lodging to be exempt from taxation, the following 2 factors come into play:

Tax Home

If the employee has more than one place of work, the “main place” or “tax home” can be identified based on:

Example 1

Let's say a Alexandra lives in Temecula, California and holds a seasonal job for eight months each year, earning $60,000. She works the other four months in Miami, also at a seasonal job, and earns $40,000. Therefore, the main place of work, which is her tax home—is Temecula under the hours and income test.

Example 2

Based on these rules, Let's say John, a resident of Dallas, Texas is hired for an indefinite period of time in Seattle, Washington. John chooses to keep his family residence in Dallas until the end of the school year. His lodging in Seattle is paid for by his employer. 

This amount will generally not qualify for tax-free treatment.

However, if John is hired for a specific project, can prove his or her tax home remains in the original city Dallas, 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.

3. Lodging Furnished by Educational Institutions

Employer-provided housing and lodging is also common with educational institutions or academic health centers. These 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:

1. Five percent of the appraised value of the qualified campus lodging  or
2. The average rent paid by individuals for lodging provided by the institution. This is the rent paid by regular residents, NOT employees or students during the year for comparable lodging. In other words, the fair market value of residential rental space.

Example

Let’s say Stanford University owns residential rental properties on and near campus. It provides a discounted rental rate for employees of the university. Non-university employee renters pay the full market value. The university property managers determine that a rental unit of 1,800 square feet would rent at market value for $4,000 per month ($48,000 per year).

Assuming the appraised value of the home as of July 1 is $700,000, 5 percent of the appraised value in this scenario would be $42,000. The lesser of these two amounts is $42,000 for the year, so if a faculty member pays the college $3,000 per month in rent for the property ($36,000 per year), the additional non-cash compensation for that faculty member would be $12,000 per year ($48,000 minus $36,000).

The additional $6,000 of value (the $48,000 full-market rental rate less $42,000, which is 5 percent of the appraised value) is a nontaxable benefit that is excluded from taxable income.