§860C — Title 26 Internal Revenue Code | U.S. Code

Summary

If you hold a residual interest in a REMIC (a mortgage investment pool), you pay tax on your daily share of the REMIC's taxable income or loss for each day you held the interest, whether or not you received any cash. The REMIC's income is figured on the accrual method, mostly like an individual's, with some special rules: its regular interests are treated as debt, and income from prohibited transactions is left out. The income or loss you report counts as ordinary, not capital. Your basis in the interest goes up by income you report and down by distributions and losses. Distributions are tax-free up to your basis; anything above that is treated as gain from selling the interest. You can't deduct a quarter's losses beyond your basis at the end of that quarter, but disallowed losses carry over to the next quarter.

Title 26, §860C

Internal Revenue Code — Source: USLM XML via OLRC

(a)(1)In 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)The 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)For purposes of this section—

(1)The 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 section 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)The 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.

(c)Any 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)(1)The 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)The 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.

(e)(1)Any amount taken into account under subsection (a) by any holder of a residual interest in a REMIC shall be treated as ordinary income or ordinary loss, as the case may be.

(2)(A)The amount of the net loss of any REMIC taken into account by a holder under subsection (a) with respect to any calendar quarter shall not exceed the adjusted basis of such holder’s residual interest in such REMIC as of the close of such calendar quarter (determined without regard to the adjustment under subsection (d)(2)(B) for such calendar quarter).

(B)Any loss disallowed by reason of subparagraph (A) shall be treated as incurred by the REMIC in the succeeding calendar quarter with respect to such holder.

(3)For special treatment of income in excess of daily accruals, see section 860E.

Notes & Related Subsidiaries

Editorial Notes

Amendments

1988—Subsec. (b)(1). Pub. L. 100–647, § 1006(t)(21), substituted “and, except as provided in

Regulations

, in the same manner” for “and in the same manner” in introductory provisions. Subsec. (b)(1)(E). Pub. L. 100–647, § 1006(t)(8)(C), added subpar. (E). Subsec. (e)(1). Pub. L. 100–647, § 1006(t)(1), substituted “ordinary” for “ordinary income” in heading and amended text generally. Prior to amendment, text read as follows: “Any amount included in the gross income of any holder of a residual interest in a REMIC by reason of subsection (a) shall be treated as ordinary income.”

Statutory Notes and Related Subsidiaries

Effective Date

of 1988 AmendmentAmendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.

§860C Taxation of Residual Interests