Homebuyer Downpayment Gift Programs

The I.R.S. has just issued a ruling (Rev. Rule 2006-27) on organizations that provide seller funded down payment assistance to home buyers.

Down payment assistance programs provide cash to home buyers that do not have the necessary down payment or closing costs to qualify for a home loan.

The I.R.S. has ruled that Seller-Funded assistance programs are not charities as defined in section 501 c3. The I.R.S determined that organizations claiming to be charities were being used to funnel money from seller to buyer in a circular financing scam and were not charities. In a typical scheme, a Seller would give the "charity" the amount of money the buyer would need to qualify to purchase the home. The charity would then gift the money back to the home buyer, less fee's for the service, and the buyer would close on the loan.

The new ruling makes it clear that seller-funded programs are not charities. No tax deduction will be given to the seller. The home buyer can not be include the amount of the assistance as a third party gift on the loan application.

Brokers, buyers and sellers are cautioned to be extremely wary of any down-payment assistance program that funnel money from seller to buyer while purporting that they operate as a charity. Such misrepresentations may constitute loan fraud and should be reported to authorities. You can learn more about this ruling at www.irs.gov/newsroom, click on "News Releases", then on "IRS Targets Down-Payment Assistance Scams".

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