Organizations that provide seller-funded down payment assistance to home buyers do not qualify as tax-exempt charities, according to recent IRS guidance. Revenue Ruling 2006-27
[PDF] also addresses whether the assistance received for down payment is treated as a gift and included in a home buyer’s basis.

Increasingly, the IRS 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. Such programs have non-charitable purposes of facilitating real estate sales for the benefit of sellers and related financing entities. Thus, the organizations do not meet the requirement of section 501(c)(3) that they be operated exclusively for charitable purposes.

“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,” said IRS Commissioner Mark W. Everson.  “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 has ruled that in the case of down-payment assistance provided by home builders and individuals selling their home, "the payments [from the seller] do not proceed from detached and disinterested generosity, but rather are in response to an anticipated economic benefit, namely facilitating the sale of the seller's home."

"This ruling doesn’t affect legitimate charities (including NeighborWorks organizations), which receive contributions that go into a capital fund or revolving loan fund rather than being applied to a specific property designated by the contributor of the funds," said Steve Tuminaro, director of public policy and legislative affairs for NeighborWorks America. "There is sure to be some confusion for all nonprofits that provide downpayment assistance until the dust settles on this ruling."

More Information

IRS News Release

IRS to Take Action Against Charity Lending Programs, Columbus Post Dispatch, May 6, 2006