How to Get Asset Disposition Statements from Residents
As a site owner or manager, you probably know that IRS auditors are entitled to look at your resident files to see whether you have obtained asset disposition statements from households at your site.
The IRS requires these statements because households have been known to shrink their assets—that is, reduce the value of their assets—to qualify for tax credit housing. A standard method of shrinking assets is selling the family home to a relative for a fraction of its value.
If the IRS finds that asset disposition statements are missing, they are likely to assume that your site is out of compliance with other tax credit program requirements, says Steven M. McDonald, an expert in HUD rules as applied to tax credit sites. And if the IRS chooses to extend its audit of the site, your administrative headaches will multiply rapidly, he adds.
We have put together a Model Form that will make it easy for you to obtain the required documentation. See our Model Form: Get Asset Disposition Statement for Each Certification and Recertification, which you can adapt and use at your site. Give the form to households and indicate that they are to complete it and return it to you. With McDonald's help, we explain what the asset disposition rule is and what our Model Form contains.
Asset Disposition Rule: The Basics
According to the HUD Handbook 4350.3, an asset is disposed of for less than fair market value if its “cash value” exceeds the gross amount the household got for it by more than $1,000. Cash value is the asset's fair market value minus the costs of disposing of the asset, such as a broker's fee, bank penalty charges, or legal fees.
When listing assets disposed of for less than fair market value on our Model Form, don't indicate their full cash value, McDonald says. Instead, indicate its value as the difference between its cash value and the amount the household got for it, he adds.
For example, on July 14, 2006, Jane deeded her house to her daughter for $50,000. If Jane had sold the house to a stranger at fair market value, she could have gotten $300,000 for it after deducting disposition costs. The house still counts as Jane's asset for any certification or recertification that is effective on or before July 13, 2008, even though Jane no longer owns the house. The house's asset value is $250,000 ($300,000 – $50,000).
Provide Residents with Model Form
Every certification or recertification file for a household must include a signed, written statement indicating whether household members have disposed of assets for less than fair market value [HUD Handbook 4350.3, par. 2-23 and app. 4].
Our Model Form asks the household head and cohead to sign the statement that applies to them. (Only the household head and cohead are required to sign the statement, McDonald says.) Statement A is that no household member has disposed of any assets for less than fair market value. Statement B is that a household member has disposed of assets for less than fair market value. Our Model Form contains space for notarization. Although not specifically required by the Handbook, having the statement notarized is a good idea, McDonald adds.
If the household head and cohead indicate that no assets have been disposed of for less than fair market value, simply insert the form into the household's file. But if they indicate a disposition for less than fair market value, you must obtain further information about the asset and the disposition.
This additional information, which includes the disposition date, the amount received, and the market value of the asset, is necessary before you can process the certification or recertification. Check Handbook 4350.3, par. 3-16 for details on what you will need and for any special exceptions that may apply.
Insider Sources
Steven M. McDonald, CPM: VP & General Mgr., Residential Div., Westlake Realty Group, Inc., AMO®, 520 S. El Camino Real, 9 Fl., San Mateo, CA 94402; (650) 579-1010, x110; steven.mcdonald@westlake-realty.com.