How to Track Assets Disposed of for Less than Fair Market Value

HUD-assisted households 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 assets.

When determining the amount of income from assets to be included in annual income, the actual income derived from the assets is included except when the cash value of all of the assets is in excess of $5,000, then the amount included in annual income is the higher of 2 percent of the total assets or the actual income derived from the assets [HUD Handbook 4350.3, par. 5-7 (F)].

If the value of a household’s assets is high enough, it might increase the household’s income to a level that would make the household ineligible to live at the site, says compliance expert Mark Chrzanowski. To get the information you need, we’ve provided a Model Form: Get Information on Assets Disposed of for Less than FMV. Be sure to give the form to applicant households at their initial certification and to current households at each annual recertification.

Inapplicable Situations

In recent years, as the result of the collapse of the housing bubble, the U.S. economy has seen significant increases in foreclosures and major decreases in property values. It’s important to note that, unless a resident’s property was sold to a relative, including the sale of a home as an asset disposed of for less than FMV because of the decline in the real estate market is incorrect.

For example, if a home was valued at $200,000 three years ago, and the family sold it this year for $75,000 because that was the most they could get for the home on the open market, there is no asset disposed of for less than FMV. The FMV is what the home is worth on the open market—that is, the price a willing buyer and a motivated seller agree on. The fact that the home was once valued at a much higher price is immaterial. In addition, assets do not include assets disposed of for less than fair market value as a result of foreclosure, bankruptcy, and a divorce or separation agreement if the applicant or resident receives important consideration not necessarily in dollars.

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 will 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 requires that you include in the household annual income either the actual income that the household’s assets earned or an imputed income of 2 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.

Insider Source

Mark Chrzanowski: Compliance Support Administrator, Gene B. Glick Management Co., 8425 Woodfield Crossing Blvd., Ste. 300W, Indianapolis, IN 46240; www.glickco.com.