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This information was published in the Novogradac Journal of Tax Credits. The complete version is available by paid subscription only. Click here for more information on subscribing.

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  • Focus On: Las Vegas, Nev.

  • Bed Bugs Ignore HUD Directives

  • Assets Disposed of for Less Than Fair Market Value

  • Q&A: Notifying the IRS of a Qualified Basis Reduction Subsequent to Building Disposition

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July 2012, Volume III, Issue VII Published By Novogradac & Company LLP



Assets Disposed of for Less Than Fair Market Value

By Grace Li and Jim Kroger, CPA, Novogradac & Company LLP

 

As part of each certification and recertification of households applying for and residing in low-income housing tax credit (LIHTC) properties, applicants and tenants are required to give a written certification as to whether any family member did or did not dispose of any assets for less than fair market value (FMV) during the two years preceding the effective date of the certification or recertification. One likely purpose of this rule, as required by the U.S. Department of Housing and Urban Development (HUD) in Handbook 4350.3 Rev-1 Section 4-24 B.8, is to ensure that applicants are not divesting themselves of their assets in order to qualify for affordable housing. Assets are considered to be disposed of for less than FMV if the net FMV of the assets disposed of exceeds the gross amount that was received by more than $1,000.

In both Examples A and B, the property is being sold at a price that is less than the net FMV. In Example A, the net FMV of the property exceeds by more than $1,000 the gross amount received by the tenant; therefore, the asset is considered to have been disposed of for less than FMV. The amount to be included as an asset for purposes of calculating annual income from assets is $5,000, which is the difference between the net FMV of the asset and the amount that was actually received in the disposition ($5,000 – $0).

In Example B, although the property is being sold for less than FMV, the net FMV does not exceed the gross amount received by the tenant because the selling costs are less in this discounted transaction (to a friend, for example)Therefore, the property in Example B is not considered to have been disposed of for less than FMV and is not included as an asset.

HUD Handbook 4350.3
Generally, as discussed in HUD Handbook 4350.3 Rev-1 Section 5-7 G.8., any asset that is disposed of for less than its FMV within the two years preceding certification or recertification should be counted as an asset for two years from the date of disposition for the purposes of determining household eligibility. The rule applies to items such as cash gifts, irrevocable trusts, and property given away or sold for less than its net cash value.

Involuntary Dispositions
However, HUD Handbook 4350.3 Rev-1 Section 5-7 G.8.d. specifically states that assets disposed of for less than FMV as the result of a foreclosure, bankruptcy, or divorce or separation agreement are not counted as assets because these are involuntary dispositions. Nevertheless, owners and managers should clearly document inquiries with the tenant as to why the disposition was involuntary and collect supporting documents where necessary, such as divorce agreements and foreclosure documents, to support the involuntary nature of the disposition.




Self Declaration
Neither the HUD Handbook nor the IRS 8823 Guide provide specific guidance on the documentation and procedures required to be obtained and performed by owners in verifying assets disposed of for less than FMV. Appendix 3 of the HUD Handbook 4350.3 Rev-1 indicates that third-party verification is not required for verifying assets disposed of for less than FMV, and only a self-declaration by the household is necessary, with the applicant or tenant listing all assets disposed of for less than FMV, the dates disposed of, the amount received, and the asset’s net FMV at the time of disposition, if applicable.

State Agency Requirements
It is recommended that owners and managers review the respective state agency guidance for any additional requirements, such as third-party verification of assets disposed of for less than FMV.

For instance, pursuant to Nevada’s LIHTC Compliance Manual, owners and managers are required to obtain a sales contract, settlement statement, recorded quit claim, foreclosure documentation, divorce decree settlement, or other documentation providing proof of the manner of disposal of the asset and any proceeds received.

The California Tax Credit Allocation Committee indicated at a recent compliance workshop that final foreclosure documents, and not notices of foreclosure, are accepted as valid documentation of foreclosed assets.

Per the Louisiana LIHTC Compliance Manual, third-party appraisals and copies of real estate closing documents indicating distribution of sales proceeds and settlement costs are the acceptable forms of verification of assets disposed of for less than FMV.

Conclusion
HUD does not require third-party verification for assets disposed of for less than FMV; however, owners and managers should review the respective state agency guidance for additional requirements, which may include third-party verification for assets disposed of for less than FMV. If assets are excluded under involuntary dispositions, tenant files should, at a minimum, demonstrate that inquiries were made into the nature of the disposed assets and that supporting documentation has been obtained to support the involuntary nature of the disposition.