How to Handle Assets Disposed of for Less than Fair Market Value
During the certification or recertification process, residents are required to report all income from all sources to the owner or manager during certification or recertification. One component of annual income is any income the household’s assets generate. And sometimes, households may dispose of assets for less than fair market value (FMV). These can include cash gifts or property. As an owner or manager, you must get correct information from residents about assets disposed of for less than FMV. That’s because a household’s income—and eligibility to live at your site—are affected by the value of its total assets. If a household’s assets are high enough, they might increase its income to a level that would make the household ineligible to live at your site.
To get the information you need, we’ve provided a Model Form: Get Information on Assets Disposed of for Less than FMV. We’ll also tell you how to use the information you get on the form to determine the right amount of those assets to include in the household’s total assets.
Use Form to Get Key Asset Information
To get key information about assets a household has disposed of for less than fair market value, your form, like our Model Form, should include the following:
Certification. The household should certify whether or not it has disposed of one or more assets for less than fair market value in the last two years. The two-year time limit is meant to prevent households from shrinking their assets to become eligible for LIHTC units at your site.
Tell the household what the term “disposed of” means—that it gave away, sold, or otherwise transferred the asset. Explain that the household should exclude assets transferred as a result of bankruptcy, foreclosure, divorce, or separation [Handbook 4350.3, par. 5 -7(G)(8)(d)]. It should also exclude assets that it placed in a nonrevocable trust if it received those assets through a judgment or settlement [HUD Handbook 4350.3, par. 5-7(G)(8)(e)].
Chart of assets. On the form include a chart to get further information from households about assets they’ve disposed of for less than fair market value. Tell the household that if it checked the box certifying that it hasn’t disposed of assets for less than fair market value, it must simply sign the form. It doesn’t have to fill in the chart. If it checked the box certifying it had disposed of assets for less than fair market value, it must fill in a chart of assets. Here’s what your chart should include:
- Description of asset such as a house or cash;
- Disposal date;
- Asset’s fair market value as of the date it was disposed;
- Sale or conversion expenses such as broker’s or attorney’s fees the household had to pay to sell the asset or convert it to cash;
- Asset’s cash value or the result of subtracting the sale expenses from the asset’s fair market value;
- Amount received (if any) for the asset; and
- Includable amount or the amount to include in the household’s assets.
Backup documentation. Have the household acknowledge that it’s responsible for providing backup documentation of the disposed asset’s fair market value, the amount it received for the asset (if any), and the costs necessary to sell the asset or convert it to cash.
Signature. Have the household head, co-head, spouse, and all other adult household members sign the form.
Witness. Include a space for a witness signature. If the form is signed in the office, you can have a staff member witness it.
Warning. Warn the household that it’s a crime to make false or fraudulent statements on the form. The warning helps you get accurate information.
Take Three Steps If Assets Were Disposed Of
Once a household has returned a form indicating that the household has disposed of an asset within the last two years for less than FMV, take the following steps:
Step #1: Check the form for correct subtractions. Make sure the household correctly subtracted the expenses that would be necessary to sell or convert the asset [Form, line #4] from the asset’s fair market value [Form, line #3]; and that the household subtracted the amount received for the asset [Form, line #6] from its cash value [Form, line #5].
Step #2: Add up the includable amounts of all the assets on the form [Form, line #7]. If the total is more than $1,000, include that amount in the household’s assets. If the total is $1,000 or less, don’t include that amount in the household’s assets [HUD Handbook 4350.3, par. 5-7(G)(8)(b)].
Step #3: Impute income if the household assets total more than $5,000. You’ll have to perform another calculation if a household’s assets (its normal assets and the amounts that you included for assets disposed of for less than FMV) are more than $5,000 [HUD Handbook 4350.3, par. 5-7(F)]. HUD requires that you include in the household annual income either the actual income that the household’s assets earned or an imputed income of .06 percent of the total amount of the household’s assets.
For example, say a household had $4,400 worth of assets, not including assets disposed of for less than FMV. After getting the form back from the household, you calculate that you must include an additional $2,000 in assets disposed of for less than FMV.
Because the household’s assets now total more than $5,000, you must include in the household’s income either the actual income from the assets, or the imputed income, whichever is greater.
Editor’s Note: The .06 percent rate became effective beginning February of this year. HUD had set the prior rate at 2 percent. In the future, HUD’s Office of Policy Development and Research will annually publish the rate and its effective date through a housing notice and will base it on the national average provided by the FDIC. And during the year, if the average differs from the established rate by 2 percent or more, HUD may publish a new rate to be used in the interim.
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