§860C Taxation of residual interests

Summary

Owners of a REMIC residual interest must report the REMIC’s income or loss for each day they owned the interest. To do that, the REMIC’s taxable income or loss is split evenly across the days in each calendar quarter, and each day’s amount is divided among that day’s owners based on how much each owned. The REMIC figures taxable income on an accrual basis and mostly like an individual, with a few special rules: regular interests are treated as debt; market discount on bonds is handled under section 1276(b)(2) (and sections 1276(a) and 1277 do not apply); income from prohibited transactions is ignored; certain partnership-style deductions (section 703(a)(2), except section 212) are not allowed; and foreclosure income is reduced by the tax in section 860G(c). Net loss means deductions minus gross income. Distributions are tax-free up to the owner’s adjusted basis, and any excess is treated as gain. An owner’s basis goes up by income taken into account and goes down (not below zero) by distributions and losses taken into account. Income or loss taken by an owner is ordinary. A loss for a quarter cannot be larger than the owner’s adjusted basis at the end of that quarter; any disallowed loss is treated as happening to the REMIC in the next quarter. Special rules for income above daily accruals appear in section 860E.