Making Sense of Household Assets: How to Navigate Four Common Areas of Confusion
When certifying or recertifying household income, knowing how to count assets properly is an area that often throws site staff. It can be tricky, but understanding when to treat an item as income or an asset is essential—counting an item as an asset when it's not may lead you to falsely disqualify a household for being over-income, or you may inadvertently certify an ineligible household, jeopardizing your site's tax credits.
We asked tax credit expert A.J. Johnson for help navigating the key difficulties when dealing with assets. In his asset training course, Johnson has identified four areas that create the most confusion for site managers: defining assets, dealing with complex assets, imputing income, and the disposition of assets.
How to Define an Asset
In many cases, site staff are uncertain about how to treat assets because, quite simply, they're not sure what an asset is. The most straightforward definition, says Johnson, is “if somebody owns something that has value, and it is not something that they use personally, it's an asset.” For instance, jewelry that a resident holds as an investment would be considered an asset; a wedding ring would not. Cash is the one exception, he adds. Cash is always an asset, even though it is something that a resident would use personally.
Generally, HUD considers an item to be an asset if it has value and may be turned into cash—whether or not it produces interest or other income—for example, savings accounts, checking accounts, stocks, bonds, retirement accounts, etc.
What is not an asset? Don't count the items that are a household member's necessary property, even if they have value. For instance, clothing, furniture, cars, coin collections, jewelry that is not held as an investment, wheelchairs or other specially equipped vehicles that a household member owns and uses to accommodate a disability, and assets that are part of an active business, such as office equipment, computers, fax machines, etc. For a full list of items that are and are not assets, consult the HUD Handbook, Exhibit 5-2.
EDITOR'S NOTE: At 100 percent tax credit sites, household assets totaling $5,000 or less do not require verification; instead, you can accept an affidavit from the household. Sites with layered subsidies, though, must verify all assets, even foreign-held assets, regardless of the amount, says Johnson.
Dealing with Complex Assets
Handling the assets that site staff rarely encounter, such as trusts and annuities, is another prime source of confusion, says Johnson. Let's look at these two potential assets in more detail.
Trusts. According to HUD, the basis for determining how to treat trusts depends on who has access to either the principal in the account or the income from the account. For instance, if a household member gets money from the trust in periodic payments, but cannot touch the principal, the payments are counted as part of the household's annual income. If any member of the household has the right to withdraw the funds in the account, the trust is considered to be an asset and is treated as any other asset.
Is it possible to have a trust that is not an asset to anybody? Yes, says Johnson. It's a concept that often throws site staff because a trust contains funds, so the money must belong to somebody, right? Not necessarily, he says. If it's a nonrevocable trust that the beneficiary can't touch until a specified date (for example, when the beneficiary turns 30), then it's not anyone's asset. “If a parent sets up a trust account for a child so that, when the child turns 30, the child gets the money, but until that time, the parent can take the money back anytime he wants, it would be a revocable trust, and it will still be the parent's asset,” he explains. “If the parent sets it up so that, no matter what happens, the child will receive the money when he or she turns 30, and the parent has no access to the funds and cannot take the money back, it is a nonrevocable trust, and it is no longer an asset.”
Annuities. The HUD Handbook defines an annuity as “a contract sold by an insurance company designed to provide payments, usually to a retired person, at specified intervals.” Like trusts, an annuity also may be treated as an asset or income.
If a household member has the right to withdraw the balance of her annuity (even with a penalty), it would be treated as an asset. Keep in mind, though, that once someone starts getting payments from an annuity, she generally loses the right to withdraw the balance.
If a resident is receiving regular payments from an annuity, and is not able to withdraw the balance as a lump sum of cash, those payments would be treated as income, and the balance of the annuity would not be counted as an asset.
Imputing Income from Assets
In addition to determining which items should be counted as income, assets, or not at all, site staff often struggle with imputing income from assets. The problem is, most people understand when to apply the rule for imputing income (when the total cash value of a household's assets exceed $5,000), they just don't understand what imputing income means, says Johnson.
“When we impute income, we're making an assumption,” he explains. “If, for example, a household has $10,000 worth of assets, and they were to convert all of those assets into cash, what would be a reasonable rate of return? We are making an assumption about the interest that the household could earn if they turned their assets into cash and invested them again. Currently, it is based on HUD's passbook rate, which is set at 2 percent.”
Here's how you would calculate imputed income from assets, according to the HUD Handbook: First, add the cash value of all assets. Multiply the total cash value of all assets by .02. The product is the “imputed income” from assets. Then, examine the actual income from all assets.
After you have determined which is greater—the actual income or the imputed income—add that amount to the regular income to determine the resident's total household income.
Disposition of Assets
The fourth area that often stumps site staff is HUD's disposition of assets rule, which was created in the early 1980s to prevent applicants from disposing of an asset so that they could qualify for affordable housing, Johnson says. When the Section 8 program launched, “there were many applicants, especially senior citizens, who had a lot of assets that prevented them from qualifying for HUD housing, so they would assign their assets to their children, essentially giving them away in order to qualify,” he recalls.
Basically, the rule states that, if a household member has disposed of or has given away an asset in the past two years for less than its fair market value, you would count the difference between what it was worth and what he received as an asset. For example, if a person has a house worth $300,000, and he sells it to his children for $100,000, that $200,000 difference will be treated as an asset for two years from the date that he disposed of it.
The HUD Handbook notes that assets disposed of for less than fair market value as a result of foreclosure, bankruptcy, divorce, or separation should not be counted. Also, if the total amount of disposed of assets is $1,000 or less, they need not be counted.
A.J. Johnson: President, A.J. Johnson Consulting Services, Inc.; (757) 259-9920; www.ajjcs.net.