§860C Taxation of Residual Interests

Summary

Holders of a REMIC residual interest must take into account their share of the REMIC’s taxable income or net loss for each day they own the interest. Each calendar quarter’s income or loss is split evenly by day, and each day’s amount is divided among the holders based on how much each held that day. The REMIC’s taxable income is figured using an accrual method like for an individual, but with special rules (for example, treating regular interests as debt, including market discount under section 1276(b)(2) and not applying sections 1276(a) and 1277, excluding items from prohibited transactions, disallowing certain partnership-style deductions under section 703(a)(2) except section 212, and reducing foreclosure-property income by the tax in section 860G(c)). Net loss means deductions exceed gross income. A REMIC distribution is tax-free up to the holder’s adjusted basis in the interest; any excess is taxed as a gain from selling the interest. A holder’s basis goes up by income items they report and goes down (but not below zero) by distributions and net losses they report. Reported amounts are ordinary income or loss. A holder’s loss for a quarter cannot exceed their quarter-end adjusted basis (before that quarter’s loss reduction); any disallowed loss is treated as the REMIC’s loss in the next quarter. See section 860E for special rules about income above daily accruals.