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MEMORANDUM

TO: AmeriDream Lender Partners &  AmeriDream Real Estate Professional Partners

DATE: August 24, 2005

SUBJECT: Deductibility of Sellers’ Contributions as “Charitable Contributions”

 


 

AmeriDream, in an effort to ensure the integrity of the down payment assistance industry, submits this memorandum regarding the deductibility of sellers’ contributions as charitable contributions. 

Some down payment assistance program providers claim that a home seller’s payment to them is entirely tax deductible as a charitable contribution.  This claim is false, and could cause a home seller to incur liability for underpayment of taxes as well as additional liability for penalties and interest associated with that underpayment.

At least one down payment assistance provider claims that the services it provides are of negligible value, and therefore that the seller’s contribution is completely tax deductible.  This is an erroneous contention.  Home sellers participating in a DPA provider’s program receive (i) the services of the DPA provider, (ii) access to an expanded pool of buyers who ordinarily would not be able to buy homes without the down payment assistance program, and (iii) ultimately a specific home buyer who has a down payment sufficient to purchase the seller’s home. 

For a payment to a 501(c)(3) organization to qualify as a charitable contribution deduction, it must be a gift.  The Internal Revenue Service has made clear that if a payment to a 501(c)(3) organization involves a service or the purchase of an item, the payment is presumed not to be a gift, and the taxpayer must demonstrate why any portion of the payment should qualify as a gift.  Under down payment assistance programs, home sellers receive something of significant value for their payments.  In particular, they receive the services provided by the DPA provider as well as ready-and-willing buyers with down payments sufficient to purchase their homes.  In these circumstances, the IRS will presume that the payment made by the home seller to the DPA provider is not a gift, and therefore not deductible as a charitable contribution.

Because a home seller receives something in return for his payment to a DPA provider, to claim any deduction at all, the home seller must demonstrate that the payment exceeds the value of the item or service received.  The difference between the payment, on the one hand, and the value of the item or service received, on the other hand, is deductible as a charitable contribution only if, in fact, such a difference exists.

Home sellers who are promised (or are impliedly encouraged to claim) tax deductibility for their payments to a DPA provider should consult their tax professionals for advice, and they should do so in advance of making any commitment.  AmeriDream’s policies in this regard are clear, and are designed to protect all parties to the transaction from violating federal and state tax laws.

To provide you with a more detailed analysis of this issue, we have added a Memorandum from our legal counsel (Womble Carlyle Sandridge & Rice) entitled “Deductibility of Sellers’ Contributions as “Charitable Contributions”” to our website.