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Seller-Funded Down Payment Assistance Programs Are Not Tax-Exempt

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 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.

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Questions and Answers 

News release IR-2006-74

Page Last Reviewed or Updated: 10-Apr-2014