Elizabeth L. Moreland, NCP-E
If a Housing Credit applicant or resident has disposed of or given away any assets for less than fair market value, the asset must be counted towards the total household income calculation for two years from the date of disposal.
That’s nice. But what does that mean?
First, let’s understand WHY this rule exists and then we can begin to understand just what a disposed of asset is an HOW to deal with it when it comes up at your properties.
This provision was added to the income determination rules so that individuals would not give their assets away in order to qualify for affordable or subsidized housing. The intent of this rule is to require the individual to use their money first rather than giving their money or assets away and then expect to qualify for such housing.
The whole premise is based on ‘fair market value’. Fair market value is what an asset is worth today. What someone could reasonably expect to get if the asset where to be sold. In cases where the individual gave the asset away and did not receive what is known as ‘fair market value in exchange’, this asset is to be included in the income calculation for determining eligibility as if the person still has it.
Because individuals can do whatever they like with their money, determining when an asset has been disposed of or given away for less than fair market value can be tricky. First, it is important that you are aware you are only concerned with assets disposed of for less than fair market value.
An asset is disposed of for less than fair market value when the individual gives away the asset, sells the asset for less than it is worth or exchanges the asset for something that is not considered to have any or a lesser fair market value.
Let’s look at some examples. If an individual has $10,000 in his checking account and spends it all on new furniture, a trip, medical expenses or a new car, the asset was disposed of BUT not for less than fair market value. The individual received something (furniture, a trip, a paid bill or a new car) in exchange for the money spent. Therefore, the money in this example, is not counted towards the total household income calculation.
But, if the individual gave $10,000 to his grandchildren, his church or let’s say to you, and received nothing of fair market value in exchange for his money, it was disposed of for less than fair market value. (Please understand that someone’s appreciate, love or blessing is not considered a fair market exchange.) Therefore, you would have to count the $10,000 as an asset.
Sometimes the individual receives partial value for his money but not full fair market value. In these cases, the difference between what was actually received and the full fair market value must be determined and that difference is considered a disposed of asset.
For example, if an individual owns a home with a fair market value of $100,000 and the costs to convert the home to cash is $10,000, the cash value of the home is $90,000. If the individual were to quit claim deed the home to a family member and receive nothing of fair market value in exchange, the entire $90,000 would be considered the disposed of asset. But, if the individual sold the home to the family member for a discounted price of $50,000, only the difference, or $40,000 would be counted as the disposed of asset.
Once a disposed of asset is discovered and it’s amount is determined, you must reflect the asset on the Tenant Income Certification (TIC) in the asset portion and then determine whether it’s inclusion will cause you to impute asset income.
Now since the asset is not really in the individual’s possession, he is not earning interest or any other type of asset income. Therefore, when including it in the income calculation, the asset will get listed with the household’s other assets but there will be no actual income associated with it. This simple step doesn’t effect the household’s income or his eligibility. However, what most often happens that may effect the individual’s eligibility, is the inclusion of this asset causes the total assets of the household to be more than $5000. This then forces you to impute the asset income and take the higher of the actual asset income versus the imputed asset income. And because disposed of assets are usually large, the imputed asset income is often the larger of the two types of asset income and can have a negative impact on the individual’s income eligibility.
If you are forced to impute, then you must take the total assets (including the disposed of asset) and multiply it by the current HUD Passbook Rate, which at this writing is 2%. You then compare the actual asset income to the imputed asset income and you use the higher of the two to add to the household’s income.
You must continue to count the disposed of asset for 2 years from the date of disposal. If the individual is moving in for the first time and disposed of the asset a year ago, the asset will only be reflected on his initial TIC and can be dropped when you complete the annual recertification. However, if the individual just disposed of the asset, it will be reflected on the initial TIC and the next annual recertification TIC and can be dropped on the third TIC.
Finally, each year, you should compare the total household assets with the previous year’s total household assets to determine if any assets have been disposed. If there is a disposal or loss of assets of $1,000 or more, you should require the individual to explain the reduction in assets. The individual should explain where the money went and if fair market value was received in exchange and if so, what was the exchange. If it is determine that the asset was disposed of for less than fair market value, this amount should be placed on the TIC for the next 2 years.