Can Employer Provided Housing Be Tax Free

Do you ever wonder if those employees who live in and operate lighthouses have to pay taxes on the value of the living space? Or, on a more practical note, let’s say that your business has a residence attached to it. Many local governmental facilities, especially park districts, have residences on their premises. Some in fact are very nice houses. It can also seem helpful to the employer to have someone live on the premises, to “keep an eye on things,” as well as helpful to an employee who may need a place to live, to have that employee live in the residence. The question is whether the value of living in the residence is taxable income attributed to the employee.

Generally, rent-free housing is taxable, but the IRS has certain narrow exceptions. One of those exceptions may fit some employers’ situations, especially local government employers. No cost housing provided by the employer is not taxable income if it is provided for the convenience of the employer. There are 3 standards that the IRS looks at:

• There must be a direct nexus between the housing and the business of the employer. For example, a park district that requires a caretaker to live on the premises to watch over and care for the park will likely meet this test.
• Living on the premises is a condition of employment. This should be memorialized, along with the reason why it is a business need in any employment agreement and/or job posting.
• The housing is furnished on the premises.

Tax regulations can be tricky. One key here is to document not only why it is important for an employee to live in the residence, but to describe their duties in that regard. It is always best to consult with your labor and employment attorneys to ensure that your employee housing decisions are sound.

Please feel free to consult the labor and employment attorneys at Ancel Glink at (312) 782-7606 on any employee-related issues.