5. Treatment of Income from Assets

- Treatment of Assets

- Asset Inclusions

- Asset Exclusions

- Annual Income Net Family Asset Inclusions and Exclusions (Exhibit 3.8 HUD Technical Guide, p.30)

- Anticipating Asset Income

- Computing the Value of Assets

- Determining Asset Income-Assets With Little or No Income

- Assets Sold Below Fair Market Value

- Examples of Assets Sold Below Fair Market Value

• Asset- a cash or non-cash item that can be converted to cash

- All assets must be verified for possible earned income- No limit on assets for the HOME program- Equity in a home is NOT counted as an asset for homeowner rehabilitation activities- Count the income earned (not the value of the asset) in projected annual income

Treatment of Assets

Asset Inclusions• Savings accounts- use current balance

• Checking accounts- use average 6-mo. Balance

• IRA, 401k, Keogh accounts

• Retirement and pension funds

• Personal property held as an investment

• Lump sum or one-time receipts (e.g., lottery winnings, inheritances)

Asset Inclusions (cont)

• Mortgages/deeds of trust

• Cash value of:- Revocable trusts - Stocks- Bonds- Treasury bills- Certificates of deposit- Money market accounts- Life insurance policies (whole life not term policies)

Asset Exclusions (cont)• Personal property (e.g. cars, furniture,

clothes)

• Assets and income that accrue to the benefit of someone not a household member

• Interest in Indian trust lands

• Equity in a cooperative in which the family lives

Asset Exclusions (cont)

• Assets not accessible to and that provide no income for the applicant

• Term life insurance policies (i.e., where there is no cash value

• Assets that are part of an active business

• "Business" does not include rental of properties that are held as an investment and not a main occupation

Anticipating Asset Income• Use actual income asset will generate during

the coming 12 months:

- interest on a savings or checking account - dividend on bond

• Count income earned even if household chooses not to receive it - Example: an applicant may elect to reinvest the interest or dividends from an asset, but the interest or dividends are still counted as income. Use copy of the IRS 1099 form showing past interest earned if account value is not anticipated to change in the near future and the interest rate has been stable.

Computing the Value of AssetsCash Value vs. Market Value

Count only the Cash Value of an asset!•

• Market Value = the dollar value on the open market• Cash Value = the Market Value less reasonable

expenses required to convert the asset to cash, such as:

- Penalties or fees for early withdrawal of a certificate of deposit- Transaction fee for converting mutual funds to cash- Broker fees for converting stocks to cash- Costs for selling real property (settlement costs, broker fees, payment of mortgage, legal fees, etc.)

Computing the Value of Assets (cont)

• Prorate assets owned by more than one person by % of ownership

• If no ownership % is stated, prorate the asset evenly among all owners

• If an asset is not effectively owned by an individual, it should not be counted as an asset in annual income.

Computing the Value of Assets (cont)

Example: Calculating the Cash Value of an Asset

A family has a certificate of deposit (CD) in the amount of $5,000 paying interest at 4%. The penalty for early withdrawal is three months of interest.

$5,000 x 0.04 = $200 in annual income$200/12 months = $16.67 interest per month$16.67 x 3 months = $50.01$5,000 - $50 = $4,950 cash value of CD

Computing the Value of Assets (cont)Example – Use Actual Income from Assets When Total Net Family

Assets are $5,000 or Less Type of Asset Cash Value Actual Yearly Income

Certificate of Deposit $1,000 withdrawal fee $50 interest @ 4%

$950

$40

Savings Account $500 interest @ 2.5%

$500

$13

Stock $300 Not paying dividends

$300

$0

Total $1,750 $53

The total cash value of the family’s assets is $1,750. Therefore, the amount that is added to annual income as income from assets is the actual income earned or $53.

Computing the Value of Assets (cont)

Example – Determining Income from Assets When Net Family Assets

Exceed $5,000

Type of Asset Cash Value Actual Yearly Income

Checking Account (non-interest bearing)

$455 $0

Savings Account (interest at 2.5%)

$6,000 $150

Stocks (not paying dividends this year)

$3,000 $0

Total $9,455 $150

Computing the Value of Assets (cont)• Total cash value of assets is greater than $5,000

- Compare the actual income from assets to the imputed income from assets

- Total cash value of assets ($9,455) is multiplied by 2% to determine the imputed income from assets

.02 x $9,455 = $189

$189 is greater than the actual income from assets ($150)

Add $189 as income from assets

Computing the Value of Assets (cont)

Example: Calculating the Cash Value of an Asset

• If a family owns real estate, it may be necessary to consider the family’s equity in the property as well as the expense to sell the property.

To determine the family’s equity, subtract amounts owed on the property from its market value

Market value- Mortgage amount owed = Equity in the property

Computing the Value of Assets (cont)

Example: Calculating the Cash Value of an Asset

Calculate the cash value by subtracting the expense of selling the property:

Equity- Expense of selling= Cash Value

Computing the Value of Assets (cont)

Example: Calculating the Cash Value of an Asset

• Juanita Player owns a rental house. The market value is $100,000. She owes $60,000. The cost to dispose of this house would be $8,000. The owner would determine the cash value as follows:

Market Value $100,000Mortgage amount - $60,000

40,000 - $8,000 Cost of disposing of the asset (real estate

commission, and other costs of sale)Cash Value $32,000

Determining Asset Income – Assets with Little or No Income

If total Cash Value of assets exceeds $5,000, use the greater of:

- Actual income from assets

OR

- Imputed income: an income amount based on a “passbook savings rate” of interest from all assets (currently 2%)

Determining Asset Income (cont)Examples1. The Jones family has $6,000 (average balance over six months) in a non interest-bearing checking account. The total income from this asset would be: $6,000 x .02 = $120.

2. The O’Gara family has $3,000 (average balance over six months) in a non interest-bearing checking account and $5,500 in an interest-bearing savings account. The PJ verifies $150 interest on the savings account. The PJ would count the greater of the actual income from assets or the imputed income as shown below:

Imputed income ($8,500 x .02) = $170

Actual income = $150

Amount included as "annual income" = $170

Assets Sold Below Fair Market Value

• Asset disposed of for less than fair market value (value in an “arms length transaction”) are counted as if still owned

- Asset amount to be included is the difference between the cash value and amount (if any) actually received

- Exceptions apply to foreclosure, bankruptcy, and divorce or separation settlement

Assets Sold Below Market Value (cont)

• Exclude assets disposed of for less than fair market value as a result of:

- foreclosure or - bankruptcy

• The disposition will not be considered to be less than fair market value if the applicant receives (or received) important consideration not measurable in dollar terms as part of a separation or divorce settlement

Examples of calculating assets disposed of for less than Fair Market Value

1. Mr. Smith cashed in stock to give a granddaughter funds for college on August 1, 2006. The stock had a market value of $4,500 and a broker fee of $500 was charged for the transaction.

- Market value = $4,500

- Less broker's fee = $ 500

- Cash value to be considered = $4,000

• The $4,000 in assets would be counted for any income determination conducted until August 1, 2008 (looking forward two years from the time of disposition).

Examples of calculating assets disposed of for less than Fair Market Value (cont)

• If Mr. Smith has no other assets, no income from assets would be included in annual income because the cash value of the asset is less than $5,000

• If other assets brought the total assets to more than $5,000, however, use an imputed income calculation

Examples of calculating assets disposed of for less than Fair Market Value (cont)

2. Mrs. Mendoza sold a piece of property to a family member for $30,000 on July 1, 2005. The home was valued at $75,000 and had no loans against it.

Market value = $75,000

Less settlement costs - 3,000

Less sales price - 30,000

Cash value to be considered = $42,000

• The $42,000 would be counted as an asset for any income determination conducted until July 1, 2007. Add to cash value of other assets (if any), and use an imputed income calculation.

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