Disposing of House for Less than Fair Market Value

Q An elderly couple at our assisted site owned a house that their son was living in. Last year, they sold it to him. I understand it was a “sweetheart deal,” allowing him to buy it at very low cost. For recertification purposes, what is the rule about disposing of an asset for less than fair market value?

A When you are figuring a household’s assets for recertification, you must include any asset that a household member sold for less than fair market value in the previous two years [HUD Handbook 4350.3, par. 5-7(G)(8)]. The amount counted as an asset is the difference between the cash value and the amount actually received.

However, this rule applies only when the fair market value or “cash value” of all the assets given away during the past two years exceeds by more than $1,000 the gross amount the household got for it [HUD Handbook 4350.3, par. 5-7(G)(8)(b)]. Cash value means the asset’s fair market value minus the cost of disposing of the asset—for example, the broker’s fee, legal fees, and closing fees.

For recertification purposes, you set the value of the asset at the difference between the asset’s cash value and the amount the household got for it. Here, let’s say the elderly couple’s house was valued at $365,000, and there were no outstanding loans (the mortgage was paid in full) secured against it. And they deeded the house to their son for $35,000. The broker’s fees and settlement costs amounted to another $25,000.

The amount counted as an asset is the difference between the cash value and the amount actually received. In this example, we would deduct the fees and costs from the market value of the house, giving it a cash value of $340,000 ($365,000 - $25,000). We then deduct the sales price paid by their son from that amount ($340,000 - $35,000), which means that $305,000 in assets were disposed of for less than fair market value. The couple gave up $305,000 when they sold their house to their son at less than fair market value. The house counts as the elderly couple’s asset for recertification purposes, even though they no longer own it.

Remember that every recertification file for a household must include a signed, written statement saying whether household members have disposed of assets for less than fair market value in the preceding two years [HUD Handbook 4350.3, par. 5-7(G)(8)(f)]. If the sale took place two years before the household moved into the assisted unit, the house would not be considered a disposed asset [[HUD Handbook 4350.3, par. 5-7(G)(8)(c)]].

The only assets disposed of for less than fair market value that are not to be counted are those involuntary dispositions resulting from bankruptcy, divorce, foreclosure, or separation [HUD Handbook 4350.3, par. 5-7(G)(8)(d)]. In these instances, 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.