Hi Chuck,
Before I dive into some of the details, here are a couple of tips that made our process so much easier.
1 – Is your pastor looking to finance the home with a mortgage through LCEF (Lutheran Church Extension Fund)? If not, I would highly recommend that he at least look at LCEF as they are well versed in doing this type of transaction.
2 – Does your pastor have an accountant that is knowledgeable in the various finance arrangements and related taxes that are available to pastor's? Reason for asking this is that our pastor's account who knows about the down payment assistance as well as housing allowance and associated taxes was in constant communication with our treasurer while we set this up for our pastor.
With regards to the down payment assistance itself:
1 – A promissory note must be created and signed by whomever is going to be on the deed of the house and whomever is named in the mortgage. For us, it was our pastor and his wife. This promissory note must state who the note holder is, which is the church, it needs to state the principle sum, as well as the repayment. You mentioned a 3-4 year debt forgiveness. We did 10 years. The promissory note also needs to stipulate what happens if your pastor leaves before the loan is paid off/forgiven. For instance, if your pastor returns his call, then the balance owed is due immediately. The promissory note must be signed by the borrowers as well as officers of the church as defined by your constitution for contractual matters. For us the signatures that was obtained were pastor and his wife as the borrowers. The president of the congregation, the board of properties chair, the treasurer, and the board of elders chair as officers of the church that approved and accepted the promissory note by the Note Holder. Pastor gets a copy of the signed promissory note and the church retains the original.
2 – There is no relation to your pastor's housing allowance except for what is reported on his W2 at the end of the year. On your pastor's W2, the amount entered for housing allowance is the approved housing allowance plus the amount that was forgiven or the year. Other than W2 reporting the housing allowance and the down payment assistance is totally separate.
3 – You mentioned about grossing it up to cover the taxes. That would not be recommended. Grossing something up to cover taxes only increases the taxes.
This all may sound complicated, it really isn't. If your church does general ledger accounting, our treasurer said that they would gladly talk to your treasurer on how we set ours up to account for everything and comply with IRS regulations.
The biggest thing is to work everything out between your church and your pastor's accountant in order to minimize the taxes, comply with IRS regulations, and help your pastor and his family out as much as possible.