IRS: Down Payment Grants Not Charity If Funded by Seller
IRS belatedly denies charity status to organizations that provide down payment assistance—funded by home builders and home sellers.
A new IRS revenue ruling has closed off charity status to nonprofits that provide downpayment assistance to home buyers, in cases where the home sellers (builiders and private sellers) have provided the funding for the downpayment grant.
We discussed these organizations not long ago in connection with a GAO report criticizing these schemes because they encouraged home purchase via FHA loan by unqualified buyers and increased the price of homes. FHA, unlike conventional lenders, permitted the practice of seller-funded downpayment assistance.
The organizations involved have become huge. Nehemiah Corporation of America (EIN 52-2145694 Form 990) reports income of $143 million, AmeriDream (EIN 52-2145694 Form 990) reports $97 million, and The Buyers Fund
(EIN 87-0635224 Form 990) $167 million. All of these organizations follow the buyer-funded
model, and the bulk of their income appears as fees rather than
contributions.
The revenue ruling allows organizations that raise money from sources other than sellers to continue as charities. Such organizations, like Family Housing Resources (EIN 86-0750139 Form 990), are much smaller. Phoenix-based FHR has a $1.2 million assistance program alongside its $8.2 million in low-income rental properties.
One lesson here is that rapid growth of a charity is not necessarily a sign of health. Growth may be because an organization (or in this case a whole industry) has found a loophole that allows it to operate a business scheme as a charity.
It is also heartening that the IRS is showing some life in curbing these schemes, as it recently did with credit counsellors.
There are a number of really bad downpayment assistance charities that should have been shut down a long time ago. But, there are others, like Nehemiah who are doing some very good work --- legitimately helping many low-income homebuyers and doing a lot of innovative charitable work that extends well beyond homeownership.
What's interesting about this situation is that the IRS and HUD have repeatedly approved this as a charitable model. Through these programs, hundreds of thousands of low income homebuyers have been able to purchase a home --- without government assistance.
For the past three years HUD and FHA have been wanting to replace this model with one of their own --- at taxpayer expense, of course. HUD has been unable to get the congressional support that it has needed.
Interesting isn't it, that these programs that have been approved by both these agencies for nearly 10 years are now being label "scams".
Watch for a push for a replacement FHA program that will cost the taxpayer and burden the low-income homebuyer with higher mortgage insurance premiums.
Posted by: Clark | May 06, 2006 at 11:20 AM