Counting an Item as Income or an Asset

If you own or manage a tax credit site, there may have been times when you had trouble deciding whether to count an investment or retirement account as income or an asset. That's probably because of the inconsistencies that appear in HUD's Occupancy Handbook 4350.3, REV-1, CHG-2, explains affordable housing consultant Elizabeth Moreland, an expert in HUD rules.

For example, Chapter 5, Paragraph 5-6, Section O, page 5-16, which discusses withdrawal of cash or assets from an investment, seems to contradict other regulations contained in the same chapter.

In reading the Handbook, you have to treat the asset section as a whole rather than as subparts separate from the whole, recommends Moreland. Clearly, you cannot count an item as both income and as an asset, which is what the Handbook is saying, albeit poorly.

Can Resident Withdraw Account Balance?

When deciding how to count an item, Moreland suggests that you start with the rule on withdrawals from an investment [Chapter 5, Section 5-6, par. O, p. 5-17], which states that “the withdrawal of cash or assets from an investment received as periodic payments should be counted as income.”

Then Moreland recommends you also look at Chapter 5, Section 5-7, Paragraph G, Subparagraph 2, page 5-30, which states:

When verifying an annuity, owners should ask the verification source whether the holder of the annuity has the right to withdraw the balance of the annuity. For annuities without this right, the annuity is not treated as an asset… Generally, when the holder has begun receiving annuity payments, the holder can no longer convert it to a lump sum of cash. In this situation, the holder will receive regular payments from the annuity that will be treated as regular income, and no calculations of income from assets will be made.

This tells you to ask the account holder if he or she has access to the account balance. In other words, if the account holder receives regular payments, you must determine whether the account holder has a right to withdraw the balance. If the holder cannot withdraw the balance, the account is not an asset. Consequently, you would treat the regular payments as income.

The Handbook provision goes on to say that if the item is income, “no calculations of income from assets will be made.” In other words, you don't treat something as both an income and as an asset, Moreland says. The provision also makes an assumption that account holders generally don't have access to the lump sum. Unfortunately, however, the Handbook does not discuss cases that do not fit its general assumption.

When Resident Can Access Balance

To gain a better insight into HUD's thinking, Moreland suggests going to the next paragraph, which states:

When an applicant or tenant has the option of withdrawing the balance in an annuity, the annuity will be treated like any other asset. It will be necessary to determine the cash value of the annuity in addition to determining the actual income earned.

Then, according to Moreland, you will want to go to Chapter 5, Section 5-7, Paragraph G, Subparagraph 4, page 5-33, which states:

Balances held in retirement accounts are counted as assets if the money is accessible to the family member. For individuals still employed, accessible amounts are counted even if withdrawal would result in a penalty. However, amounts that would be accessible only if the person retired are not counted.

In these two provisions, HUD is discussing accounts where there is access to the balance, Moreland says. If the holder has access to the balance in the account, you must consider the account to be an asset.

Nowhere does the Handbook ever state that you are to count an account as both income and as an asset, Moreland emphasizes. If HUD wanted you to do this, the Handbook would have clearly stated it and provided an example.

Treatment of Income-Producing Asset

If an account produces regular income (something received regularly and periodically), that income is annualized. If the account is an asset (something held in an accessible lump sum with or without asset income, usually in the form of interest or dividends), the cash value and the actual and imputed asset income must be determined.

“Imputed” income is calculated by multiplying the cash value of a household's assets by the percentage rate specified by HUD, which is currently 2 percent [Handbook 4350.3, par. 5-7(F)(1)(b)]. Regarding income calculation, HUD's basic rule is that if, during certification, a household's assets are valued at $5,000 or more, the amount of income from those assets that you would add to annual income is the greater of actual or imputed income. Imputing the asset income isn't always necessary, but will be most of the time as these assets are usually large enough to cause the total cash value of all the assets to be greater than $5,000.

After you have determined which is greater—the actual income or the imputed income—add that amount to the regular income to determine the resident's total household income.

Example: First, consider how the asset works—as an annuity, retirement account, or general investment. If a resident has a lump sum of money held in an account:

• The lump sum may or may not be accessible;

• Some interest or dividends are probably—but not necessarily—being earned; and

• Regular withdrawals or payments are possibly being received.

If the resident receives regular payments that come from the lump sum of the account, then the asset works as a retirement account. In other words, if the resident has $200,000 in such an account and receives $1,000 per month, the monthly payments are coming from the $200,000, which means that principal amount is going down each month. If the account is also generating income (from dividends and/or interest), the amount the account goes down each month is offset by this income generation, maybe even to the point the account makes more money than it is giving out.

If the account holder who receives the $1,000 monthly payments also has access to the $200,000 balance, the holder could decide to withdraw the entire amount, even if there are severe penalties for doing so. If he does make this withdrawal, the $1,000 payments will stop, because there is no more lump sum from which to draw these payments.

This is the reason you don't count something as both income and as an asset: The regular monthly payments are a part of this lump sum. If the holder has access to the lump sum, by counting its current balance (less any penalties for converting it to cash), you are already counting the monthly payments.

If the holder does not have access to the lump sum, you have to count the monthly payments. But you never count them both as income and as an asset. Otherwise, you are counting $12,000 ($1,000 monthly payments x 12 months) of the $200,000 lump sum twice: $12,000 as true income and $12,000 of the $200,000 cash value, which will cause you to impute.

For example, if an asset is also producing $3,000 in income per year ($200,000 x 1.5%), you would count the $3,000 as income (higher of the imputed, which is $200,000 x 2%, vs. the actual) plus the $12,000 as regular income.

If you consider the account as both income and as an asset, you would conclude that the holder received $16,000 in income from this account. But, had you done that, you would risk putting the resident over income, or of forcing the available unit rule to be invoked when performing a recertification, Moreland says.

Further Reading: For a related article, see “Follow Rules for Calculating Income from Assets,” Insider, September 2007, p. 1.

Insider Source

Elizabeth Moreland: President, Elizabeth Moreland Consulting Services Inc., 6907 University Ave., Ste. 196, Middleton, WI 53562; (800)644-0390; elizabeth@taxcredit.com.

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