Introduction
HUD Notice H 2013-10 expands upon the Final Rule for implementing the Housing Opportunity Through Modernization Act (HOTMA). This final rule makes some changes to the way managers of HUD-assisted housing will deal with assets on HUD-assisted properties. Since LIHTC properties are required to follow HUD rules relative to the determination of income, these changes also apply to tax credit properties.
Net family assets are defined as the net cash value of all assets owned by the family, after deducting reasonable costs that would be incurred in disposing of real property, savings, stocks, bonds, and other forms of investment, except as excluded by regulation.
Assets with Negative Equity
While assets with negative equity are still considered assets, the cash value of real property or other assets with negative equity are considered to have zero value for purposes of calculating net family assets. Negative numbers are never used in the calculation of asset value.
Assets Owned by a Business Entity
If a business entity (e.g., LLC or LP) owns an asset, then the family’s asset is their ownership stake in the business. The actual assets of the business are not counted as family assets. However, if the family holds the assets in their name (e.g., they own 1/3 of a restaurant) rather than in the name of the business entity, then the percentage value of the asset owned by the family is what is counted toward the net family assets (e.g., one-third of the value of the restaurant).
Jointly Owned Assets
For assets jointly owned by the family and one or more individuals outside of the assisted family, owners must include the total value of the asset in the determination of net family assets, unless the asset is otherwise excluded, or unless the assisted family can demonstrate that the asset is inaccessible to them, or that they cannot dispose of any portion of the asset without the consent of another owner who refuses to comply. If the family demonstrates that they can only access a portion of an asset, then only that portion’s value shall be included in the calculation of net family assets.
Exclusions from Assets
Required exclusions from net family assets include the following:
- The value of necessary items of personal property;
- The value of all non-necessary items of personal property with a total combined value of $50,000 or less, annually adjusted for inflation;
- The value of any retirement plan recognized by the IRS, including IRAs, employer retirement plans, and retirement plans for self-employed individuals;
- The value of real property that the family does not have the effective legal authority to sell. Examples of this include (1) co-ownership situations {including situations where one owner is a victim of domestic violence} where one party cannot unilaterally sell the property, (2) property that is tied up in litigation, and (3) inherited property in dispute;
- The value of any education savings account under Section 530 of the IRC 1986, the value of any qualified tuition program under Section 529 of the IRC, and the contributions to and distributions from any Achieving a Better Life Experience (ABLE) account authorized under Section 529A of the IRC;
- The value of any “baby bond” account created, authorized, or funded by the federal, state, or local government (money held in trust by the government for children until they are adults);
- Interests in Indian trust land;
- Equity in a manufactured home where the family receives assistance under the Housing Choice Voucher Program;
- Equity in a property under the Homeownership Option where the family receives assistance under the Housing Choice Voucher Program;
- Family Self-Sufficiency accounts;
- Federal or state tax refunds or refundable tax credits for 12 months after receipt by the family;
- The full amount of assets held in an irrevocable trust; and
- The full amount of assets held in a revocable trust where a member of the family is the beneficiary, but the grantor and trustee of the trust is not a member of the family.
Necessary & Non-Necessary Personal Property
Necessary personal property is excluded from assets. Non-necessary personal property with a combined value of more than $50,000 (adjusted by inflation) is an asset. When the combined value of non-necessary personal property does not exceed $50,000, it is excluded from assets.
All assets are categorized as either real property (e.g., land, a home) or personal property. Personal property includes tangible items, like boats, as well as intangible items, like bank accounts. For example, a family could have non-necessary personal property with a combined value that does not exceed $50,000 but also own real property such as a parcel of land. While the non-necessary personal property would be excluded from assets, the real property would be included – regardless of its value, unless it meets a specific exclusion.
Necessary personal property are items essential to the family for the maintenance, use, and occupancy of the premises as a home; or they are necessary for employment, education, or health and wellness. Necessary personal property includes more than mere items that are indispensable to the bare existence of the family. It may include personal effects (such as items that are ordinarily worn or used by the individual), items that are convenient or useful to a reasonable existence, and items that support and facilitate daily life within the family’s home. Necessary personal property does not include bank accounts, other financial investments, or luxury items.
Determining what is a necessary item of personal property is very fact-specific and will require a case-by-case analysis. Following are examples of necessary and non-necessary personal property (not an exhaustive list).
Necessary Personal Property
- Vehicles used for personal or business transportation;
- Furniture and appliances;
- Common electronics such as TV, radio, DVD players, gaming systems;
- Clothing;
- Personal effects that are not luxury items (e.g., toys and books);
- Wedding & Engagement rings;
- Jewelry used in religious or cultural celebrations or ceremonies;
- Medical equipment & supplies;
- Musical instruments used by the family;
- Personal computers, tablets, phones, and related equipment;
- Educational materials; and
- Exercise Equipment
Non-Necessary Personal Property
- RVs not needed for day-to-day transportation, including motor homes, campers, and all-terrain vehicles;
- Bank accounts or other financial investments (e.g., checking/savings account, stocks/bonds);
- Recreational boats or watercraft;
- Expensive jewelry without cultural or religious significance or which has no family significance;
- Collectibles, such as coins or stamps;
- Equipment/machinery that is not part of an active business; and
- Items such as gems, precious metals, antique cars, artwork, etc.
Trusts
Any trust (both revocable and non-revocable) that is not under the control of the family is excluded from assets.
For a revocable trust to be excluded from net family assets, no family or household member may be the account’s trustee.
A revocable trust that is under the control of the family or household (e.g., the grantor is a member of the assisted family or household) is included in net family assets, and, therefore, income earned on the trust is included in the family’s income from assets. This also means that PHAs/MFH Owners will calculate imputed income on the revocable trust if net family assets are more than $50,000, as adjusted by inflation, and actual income from the trust cannot be calculated (e.g. if the trust is comprised of farmland that is not in use).
Actual Income from a Trust
If the Owner determines that a revocable trust is included in the calculation of net family assets, then the actual income earned by the revocable trust is also included in the family’s income. Where an irrevocable trust is excluded from net family assets, the Owner must not consider actual income earned by the trust (e.g., interest earned, rental income if the property is held in the trust) for so long as the income from the trust is not distributed.
Trust Distributions & Annual Income
A revocable trust is considered part of net family assets: If the value of the trust is considered part of the family’s net assets, then distributions from the trust are not considered income to the family.
Revocable or irrevocable trust not considered part of net family assets: If the value of the trust is not considered part of the family’s net assets, then distributions from the trust are treated as follows: (1) All distributions from the trust’s principal are excluded from income. (2) Distributions of income earned by the trust (i.e., interest, dividends, realized gains, or other earnings on the trust’s principal), are included as income unless the distribution is used to pay for the health and medical expenses for a minor.
Actual & Imputed Income from Assets
The actual income from assets is always included in a family’s annual income, regardless of the total value of net family assets or whether the asset itself is included or excluded from net family assets unless that income is specifically excluded.
Income or returns from assets are generally considered to be interest, dividend payments, and other actual income earned on the asset, and not the increase in market value of the asset.
Imputed income from assets is no longer determined based on the greater of actual or imputed income from the assets. Instead, imputed asset income must be calculated for specific assets when three conditions are met: (1) The value of net family assets exceeds $50,000 (as adjusted for inflation); (2) The specific asset is included in net family assets; and (3) Actual asset income cannot be calculated for the specific asset. Imputed asset income is calculated by multiplying the net cash value of the asset, after deducting reasonable costs that would be incurred in disposing of the asset, by the HUD-published passbook rate. If the actual income from assets can be computed for some assets but not all assets, then PHAs/MFH Owners must add up the actual income from the assets, where actual income can be calculated, then calculate the imputed income for the assets where actual income could not be calculated. After the PHA/MFH owner has calculated both the actual income and imputed income, the housing provider must combine both amounts to account for income on net family assets with a combined value of over $50,000. When the family’s net family assets do not exceed $50,000 (as adjusted for inflation), imputed income is not calculated. Imputed asset income is never calculated on assets that are excluded from net family assets. When actual income for an asset — which can equal $0 — can be calculated, imputed income is not calculated for that asset.
Owners should not conflate an asset with an actual return of $0 with an asset for which an actual return cannot be computed, such as could be the case for some non-financial assets that are items of nonnecessary personal property. If the asset is a financial asset and there is no income generated (for example, a bank account with a 0 percent interest rate or a stock that does not issue cash dividends), then the asset generates zero actual asset income, and imputed income is not calculated. When a stock issues dividends in some years but not others (e.g., due to market performance), the dividend is counted as the actual return when it is issued, and when no dividend is issued, the actual return is $0. When the stock never issues dividends, the actual return is consistently $0.
Self-Certification of Net Family Assets Equal to or Less Than $50,000
Owners may determine net family assets based on a self-certification by the family that the family’s total assets are equal to or less than $50,000, adjusted annually for inflation, without taking additional steps to verify the accuracy of the declaration at admission and/or reexamination. Owners are not required to obtain third-party verification of assets if they accept the family’s self-certification of net family assets. When Owners accept self-certification of net family assets at reexamination, the Owner must fully verify the family’s assets every three years. Owners may follow a pattern of relying on self-certification for two years in a row and fully verifying assets in the third year.
The family’s self-certification must state the amount of income the family anticipates receiving from such assets. The actual income declared by the family must be included in the family’s income unless specifically excluded from income under HUD regulations. Owners must clarify, during the self-certification process, which assets are included/excluded from net family assets. Owners may combine the self-certification of net family assets and questions inquiring about a family’s present ownership interest in any real property into one form.
Bottom Line
Owners and managers of properties that are subject to HOTMA should familiarize themselves with these new asset rules and ensure they are in place. HUD properties will be required to implement the rules when they put the HOTMA changes into effect in 2024. LIHTC properties should consult the appropriate HFA to determine when the new rules must be followed.