§860C Taxation of Residual Interests

Summary

Holders of a residual interest in a REMIC must report each day’s share of the REMIC’s taxable income or net loss for every day they own the interest. The REMIC’s quarterly income or loss is split evenly across the days in the quarter, and each day’s amount is divided among holders based on their holdings that day. A REMIC figures its taxable income using the accrual method, mostly like an individual return, but with some changes: regular interests can be treated as debt, market discount rules apply under section 1276(b)(2) (and sections 1276(a) and 1277 do not apply), items from prohibited transactions are ignored, most deductions under section 703(a)(2) (except under section 212) are not allowed, and income from foreclosure property is reduced by the tax in section 860G(c). Net loss equals allowable deductions minus gross income, with the same adjustments. Distributions are tax-free up to the holder’s adjusted basis and are treated as gain if they exceed basis. A holder’s basis goes up by income taken into account and goes down (not below zero) by distributions and losses taken into account. Amounts are ordinary income or loss. Losses a holder claims in a quarter cannot exceed their adjusted basis at quarter end; any disallowed loss carries forward to the next quarter. For special rules on income above daily accruals, see section 860E.