Eligibility
Taxpayer must hold a residual interest in a Real Estate Mortgage Investment Conduit (REMIC). Deductions are limited to the taxpayer's adjusted basis in the interest, with an indefinite carryforward for excess losses.
Frequently Asked Questions
Who is eligible for the REMIC Residual Interest Loss Pass-Thru?
Taxpayer must hold a residual interest in a Real Estate Mortgage Investment Conduit (REMIC). Deductions are limited to the taxpayer's adjusted basis in the interest, with an indefinite carryforward for excess losses.
How does the REMIC Residual Interest Loss Pass-Thru work?
Holders of residual interests in a REMIC can deduct their daily portion of the REMIC's net loss as an ordinary loss.
What law authorizes the REMIC Residual Interest Loss Pass-Thru?
The REMIC Residual Interest Loss Pass-Thru is authorized under IRC §860C of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §860C
Source: Internal Revenue Code, Title 26, United States Code
§ 860C. Taxation of residual interests(a) Pass-thru of income or loss(1) In generalIn determining the tax under this chapter of any holder of a residual interest in a REMIC, such holder shall take into account his daily portion of the taxable income or net loss of such REMIC for each day during the taxable year on which such holder held such interest.
(2) Daily portionThe daily portion referred to in paragraph (1) shall be determined—(A) by allocating to each day in any calendar quarter its ratable portion of the taxable income (or net loss) for such quarter, and
(B) by allocating the amount so allocated to any day among the holders (on such day) of residual interests in proportion to their respective holdings on such day.
(b) Determination of taxable income or net lossFor purposes of this section—(1) Taxable incomeThe taxable income of a REMIC shall be determined under an accrual method of accounting and, except as provided in regulations, in the same manner as in the case of an individual, except that—(A) regular interests in such REMIC (if not otherwise debt instruments) shall be treated as indebtedness of such REMIC,
(B) market discount on any market discount bond shall be included in gross income for the taxable years to which it is attributable as determined under the rules of section 1276(b)(2) (and sections 1276(a) and 1277 shall not apply),
(C) there shall not be taken into account any item of income, gain, loss, or deduction allocable to a prohibited transaction,
(D) the deductions referred to in section 703(a)(2) (other than any deduction under section 212) shall not be allowed, and
(E) the amount of the net income from foreclosure property (if any) shall be reduced by the amount of the tax imposed by section 860G(c).
(2) Net lossThe net loss of any REMIC is the excess of—(A) the deductions allowable in computing the taxable income of such REMIC, over
(B) its gross income.
Such amount shall be determined with the modifications set forth in paragraph (1).
(c) DistributionsAny distribution by a REMIC—(1) shall not be included in gross income to the extent it does not exceed the adjusted basis of the interest, and
(2) to the extent it exceeds the adjusted basis of the interest, shall be treated as gain from the sale or exchange of such interest.
(d) Basis rules(1) Increase in basisThe basis of any person’s residual interest in a REMIC shall be increased by the amount of the taxable income of such REMIC taken into account under subsection (a) by such person with respect to such interest.
(2) Decreases in basisThe basis of any person’s residual interest in a REMIC shall be decreased (but not below zero) by the sum of the following amounts:(A) any distributions to such person with respect to such interest, and
(B) any net loss of such REMIC taken into account under subsection (a) by such person with respect to such interest.
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