Anyone who is currently trying to buy a home in the United States is well aware of the low inventory of homes available and the record prices. The current home buying environment is particularly difficult for low-income first-time home buyers who may have difficulty making a large down payment, and these difficulties may be particularly pronounced for black, Indigenous people. or color. To help first-time home buyers successfully buy a home, for-profit and non-profit entities recently announced significant efforts to provide down payment assistance.
All organizations described in Section 501 (c) (3) of the Internal Revenue Code (charities) must be operated in the public interest and not for the purpose of providing ineligible benefits to individuals other than members of the charitable class that the organization serves. A charity wishing to help people by offering a down payment assistance program should ensure that it structure its program in such a way that it complies with statute 501 (c) (3) of the organization. This article describes some of the key considerations for charities establishing a fundraising assistance program:
- Make assistance available exclusively to individuals and families in financial need. The IRS has approved the use of standards set by the Department of Housing and Urban Development (HUD) to determine whether applicants are considered low income. It may be acceptable to use other methods to ensure that all beneficiaries are members of a class of charity in financial need.
- Take into account the ability of the beneficiaries to repay the loan. A down payment assistance program that the IRS blessed in Tax Decision 2006-27 gathered information on the employment and financial history of borrowers to ensure they would qualify for a mortgage without the absence of a deposit. Charities should avoid facilitating a loan that the borrower cannot afford.
- Think about livability. Charities should establish a process to ensure that they are not providing down payment assistance related to uninhabitable property.
- Evaluate sources of funding. The IRS looks favorably upon charities that attract financial support from a range of foundations, businesses, and members of the general public (as opposed to a small number of donors). This ensures that the organization is “not beholden to particular donors or other supporters” and that it is not exploited for the benefit of private interests.
- Maintain broad eligibility criteria. Charities that provide assistance to a large segment of the public in financial need, as opposed to those with a relationship with a particular business or family, are more likely to qualify for 501 (c) status (3 ).
- Carefully structure the grant making process. The organization approved in Tax Decision 2006-27 has structured its grant-making processes so that those selecting grant recipients do not know the identity of the party selling the house or the identity of any real estate agent. , promoter or other party who could benefit financially from the sale. This helps to ensure that the program is implemented for the benefit of those in financial need and not other parties.
- Refuse charitable contributions contingent on the sale of houses. Charities should not receive contributions that depend on the sale of a particular home, or payment or fees associated with the purchase of a home by a grant recipient. Receipt of these payments generally suggests that a substantial objective of the program is to benefit individuals with an interest in the sale. Payments intended to benefit a particular person are not tax deductible as charitable contributions.
- Monitor lobbying activities. Like other organizations, 501 (c) (3) organizations can advocate for housing reforms, and many do. However, lobbying activities can only be an insignificant part of a charity’s activities (or must be within the limits set by section 501 (h) for organizations that have chosen to be governed by this section. ).
- Consider offering personal financial education programs and activities. In addition to providing down payment assistance, charities may also want to organize educational activities to help individuals prepare for the financial responsibilities of homeownership. The IRS has recognized these educational efforts as charitable activities. If a charity conducts these activities, it must determine whether it will become subject to section 501 (q) of the Code, which places limits on the fees an organization can charge and requires the organization to maintain a certain membership. from the administration board.
Overall, a charity wishing to help low-income individuals and families by establishing a down payment assistance program should carefully consider how best to structure its program in accordance with the requirements and limitations outlined below. above.[View source.]