January 18, 2011
Authored by: Keith Kehrer
The IRS continues to crackdown on down payment assistance programs that involve “gifts” by the selling party. Under these programs, the organization offers down payment assistance to buyers who cannot afford the 3% down payment necessary to qualify for a federally insured (HUD) loan. In order to raise the funds, the organization requires participating sellers to agree to donate the 3% down payment to the organization. Despite the fact that the “donation” by the seller matches the buyer’s 3% down payment (which is transferred to the seller as part of the purchase price), these organizations maintain that the down payment assistance is funded with other donations. However, these organizations rarely demonstrate funds from any other sources. In Private Letter Ruling 201102064, released today, the IRS denied tax-exempt status to another organization structured in this manner on the basis that the organization operates with a substantial non-exempt purpose and for the benefit of private interests (including the sellers, and in many cases, real estate brokers). This is not a new development but merely another ruling in a long line of recent letter rulings scrutinizing down payment assistance programs that operate in this manner.