In a ruling released last Thursday, the US Internal Revenue Service stated that organizations that provide seller-funded down-payment assistance to home buyers do not qualify as tax-exempt charities.
Down-payment assistance programs provide cash assistance to homebuyers who cannot afford to make the minimum down payment or pay the closing costs involved in obtaining a mortgage.
Such programs can qualify as tax-exempt charitable and educational organizations under Internal Revenue Code section 501(c)(3) when properly structured and operated.
In Revenue Ruling 2006-27, published last week, the IRS provided a detailed discussion of the guidelines.
The ruling makes it clear that seller-funded programs are not charities because they do not meet the requirements of section 501(c)(3).
Increasingly, the IRS revealed, it has found that organizations claiming to be charities are being used to funnel down-payment assistance from sellers to buyers through self-serving, circular-financing arrangements. In a typical scheme, there is a direct correlation between the amount of the down-payment assistance provided to the buyer and the payment received from the seller. Moreover, the seller pays the organization only if the sale closes, and the organization usually charges an additional fee for its services.
“The IRS is increasingly concerned with organizations that are taking advantage of homebuyers who need assistance for a down payment to realize the American dream of homeownership,” explained IRS Commissioner Mark W. Everson, continuing: “So-called charities that manipulate the system do more than mislead honest homebuyers and ultimately jack up the cost of the home. They also damage the image of honest, legitimate charities.”
The IRS is currently examining 185 organizations that operate down-payment-assistance programs.
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