Parton, who is thought to have earned millions of dollars in royalties from the 1973 song, saw her fortune grow after gaining a songwriting credit for Houston’s iconic 1992 cover – which featured on the soundtrack to The Bodyguard.
Speaking on Watch What Happens Live With Andy Cohen, Parton explained how she used the money to invest in the community.
“I bought my big office complex down in Nashville, and so I thought, ‘Well, this is a wonderful place to be,’” Parton said.
The neighbourhood, named Sevier Park, is home to predominantly Black families and businesses.
“It was a whole strip mall, and I thought this is the perfect place for me to be, considering it was Whitney, so I just thought, ‘This is great, I’m just going to be down here with her people, who are my people as well,’ ” Parton said.
She added, “I love the fact that I spent that money on a complex and I think, ‘This is the house that Whitney built.’ ”
Parton earned at least $10 million from the track in the 1990s, Forbes estimated last year.
As of 2019, the album was also the best-selling film soundtrack of all time.
Speaking to the Washington Post, Nashville historian David Ewing added: “We’re just hearing now, because of the Black Lives Matter movement, how down for the cause Dolly has always been — even when others in the music industry weren’t.
“Dolly Parton could have built and bought any piece of property in Nashville. But you would have to have gone out of your way to buy in the 12 South neighbourhood, because no Realtor would have shown Dolly that lot to buy.”
Parton’s generous gesture comes after it was revealed last year that she donated $1m (£716,000) to the team behind the Moderna coronavirus vaccine.