Organizations that provide seller-funded down-payment assistance to home buyers do not qualify as tax-exempt charities, the Internal Revenue Service said in a ruling last week.
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 the Internal Revenue Code if properly structured and operated.
The ruling says that seller-funded programs are not charities. The agency said that 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.
A March 2005 report commissioned by the U.S. Department of Housing and Urban Development found that seller-funded down-payment assistance has led to underwriting problems and resulted in an increase in the effective cost of homeownership. A Government Accountability Office report from November 2005 found similar results.
The IRS is examining 185 organizations that operate down-payment-assistance programs and the agency has already denied applications for tax exemption from over 20 organizations.
Revenue Ruling 2006-27 is available at www.irs.gov/pub/irs-drop/rr-06-27.pdf.
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