Industry News

IRS to strip down-payment gift programs of tax-exempt status

Agency aims to stop 'circular-financing' schemes

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 Thursday. Down-payment-assistance programs, such as those at Nehemiah Corp. and AmeriDream, provide cash assistance to home buyers who cannot afford to make the minimum down payment or pay the closing costs involved in obtaining a mortgage. The gifts typically range from 2 percent to 5 percent of the purchase price, and home buyers aren't required to repay the money. 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 Thursday's ruling, the IRS provides a detailed discussion of the guidelines – including two examples that meet – and one that fails to meet – the tests for exemption, and makes it clear that seller-funded programs are not charities because they do not meet the code requireme...