Take 2 Steps to Correctly Calculate Income from Assets
Even though HUD doesn’t administer the tax credit program, the tax credit law requires owners and managers to use the HUD rules for calculating household income at a tax credit site. As such, when certifying or recertifying housing income, you must include any income the household's assets generate. But, according to HUD rules, how you calculate the income from assets depends on whether the cash value of those assets is more than $5,000 or is $5,000 or less. If you don't follow the rules correctly, you could miscalculate a household's annual income, a key component in determining whether the household is eligible to live at your site. To help you comply with HUD rules, we'll describe two steps to take when calculating income from household assets.
Step #1: Determine Total Cash Value of Household Assets
Because HUD rules require that you treat income from assets differently depending on whether they have a total cash value of more than $5,000 or of $5,000 or less, you first must determine the total cash value of a household's assets. To do that, you must:
Identify all household assets. HUD defines “assets” as “items of value that may be turned into cash” [HUD Handbook 4350.3, par. 5-7(A)(1)]. This includes saving accounts, stocks, bonds, mutual funds, and retirement accounts. See Handbook 4350.3, Exhibit 5-2(A) for a list of the types of items HUD considers assets.
When totaling a household's assets, keep in mind that you mustn't count certain assets, like necessary personal property. This includes, for instance, clothing, furniture, cars, coin collections, jewelry that’s 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, etc. See Exhibit 5-2(B) of Handbook 4350.3 for a list of the types of assets that you shouldn't count.
Remember that at 100 percent tax credit sites, household assets totaling $5,000 or less don’t 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.
Determine each asset's cash value. An asset's “cash value” is the asset's market value less reasonable expenses that the household would need to pay to sell or convert the asset to cash [Handbook 4350.3, par. 5-7(C)(1)(a)]. In other words, it's the amount the household would actually get if it sold the asset or converted it to cash.
For example, a household owns a certificate of deposit (CD) currently valued at $775. The CD carries a 1 percent early withdrawal penalty ($7.75). The CD's cash value is $767.25 ($775-$7.75).
Total all asset values. Once you know the cash value of each household asset, add them together. This will give you the total cash value of the household's assets. For example, a household has a savings account with a cash value of $600, a savings bond with a cash value of $240, and a small real estate holding with a cash value of $7,500. The total cash value of the household's assets is $8,340.
Step #2: Determine Includable Income
The next step is to determine the amount of income from the household's assets to include in the household's income. How you do that depends on the amount of total assets you get from Step #1.
If assets total $5,000 or less. If a household's assets have a total cash value of $5,000 or less, include in the household's annual income the actual income that the assets are expected to earn [Handbook 4350.3, par. 5-7(E)].
For example, a household has two assets: a CD with a cash value of $1,500, and $300 in cash on hand. These two assets have a total cash value of $1,800, which is less than $5,000. Therefore, you include in household income the actual amount of the income that the assets are expected to earn—$30 for the CD and nothing on the cash. So you would include $30 dollars in the household's annual income.
If assets total more than $5,000. If a household's assets have a total cash value of more than $5,000, include in annual income the greater of:
- The actual income that all of the household's assets are expected to earn in the next 12 months (determine actual income the same way it was done in the example above); or
- The imputed income from the assets. Imputing income means that you treat the assets as though they've generated income even if they haven't. According to HUD's rules, you determine imputed income by multiplying the total cash value of household assets by 0.06 percent. So the imputed income for a $10,000 asset would be $6 ($10,000 × .06%).