Incentive Payments Made to Homeowner Under HAMP Excludible from Homeowner's Gross Income

Rev. Rul. 2009-19, 2009-28 I.R.B. __: Pay-for-Performance Success Payments made under the U.S. government's Home Affordable Modification Program are excludible from income under general welfare exclusion.

Discussion: The U.S. government's Homeowner Affordability and Stability Plan (HAMP) helps at-risk homeowners modify their mortgages to avoid foreclosure. Under the HAMP, homeowners who make timely payments on their modified loans are eligible to have incentive payments made on their behalf to lenders/investors. Each month that a homeowner makes a mortgage payment on time, the homeowner accrues an amount toward a Pay-for-Performance Success Payment. A payment of the accrued amounts is made annually, to reduce the principal balance on the homeowner's mortgage loan. Homeowners can receive principal reductions of up to $1,000 per year for up to five years, subject to a de minimis threshold. The Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation have a substantial role in administering HAMP.

The IRS ruled that if a homeowner benefits from Pay-for-Performance Success Payments under the HAMP, the payments are excludible from income under the general welfare exclusion.

Citing Rev. Rul. 74-205, 1974-1 C.B. 20, and Rev. Rul. 98-19, 1998-1 C.B. 840, the IRS reasoned that Pay-for-Performance Success Payments made under the HAMP promote the general welfare by helping homeowners who are at risk of losing their homes pay the mortgage loans on their primary residences and do not involve the performance of services.

Rev. Rul. 2009-19 is scheduled to appear in I.R.B. 2009-28, dated July 13, 2009.