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Down-payment assistance organizations lose exempt status

November 17, 2008

One of the harbingers of the current mortgage finance crisis was the rise of the "Down-payment assistance" organization. These outfits were set up as non-profits, but their main role was to allow borrowers and lenders to pretend that the borrower had a down payment.

Typically a home seller would "contribute" an amount to one of these outfits in the amount of the mortgage lender's required down payment - or at least enough to make up the borrower's shortfall. This "charity" would funnel the cash to the homebuyer, after taking a cut; the homebuyer then miraculously qualified for the mortgage, somehow.

The IRS ruled in 2006 that this sort of operation couldn't be done through a tax-exempt charity. This week the IRS has released rulings stripping two more down-payment assistance outfits of their tax examption.

Cite: PLR 200846029; PLR 200846025

Tags: down-payment assistance.