Holders of interests in real estate mortgage investment conduits
(REMICs), financial asset securitization investment trusts (FASITs),
and other collateralized debt obligations (CDOs) must follow special
rules for reporting income and any expenses from these investment
products.
REMICs
A real estate mortgage investment conduit (REMIC) is an
entity that is formed for the purpose of holding a fixed pool of
mortgages secured by interests in real property. A REMIC issues
regular and residual interests to investors. For tax purposes, a REMIC
is generally treated as a partnership with the residual interest
holders treated as the partners. The regular interests are treated as
debt instruments.
REMIC income or loss is not income or loss from a passive activity.
For more information about the qualifications and the tax treatment
that apply to a REMIC and the interests of investors in a REMIC, see
sections 860A through 860G of the Internal Revenue Code, and the
regulations under those sections.
Regular interest defined.
A REMIC can have several classes (also known as "tranches") of
regular interests. A regular interest unconditionally entitles the
holder to receive a specified principal amount (or other similar
amount).
Residual interest defined.
A residual interest is an interest in a REMIC that is not a regular
interest. It is designated as a residual interest by the REMIC.
Tax Treatment of
REMIC Regular Interests
A REMIC regular interest is treated as a debt instrument for income
tax purposes. Accordingly, the OID, market discount, and income
reporting rules that apply to bonds and other debt instruments as
described earlier in this publication under Discount on Debt
Instruments apply, with certain modifications discussed below.
Generally, you report your income from a regular interest on line
8a, Form 1040. For more information on how to report interest and OID,
see How To Report Interest Income, earlier.
Holders must use accrual method.
Holders of regular interests must use an accrual method of
accounting to report OID and interest income. Because income under an
accrual method is not determined by the receipt of cash, you may have
to include OID or interest income in your taxable income even if you
have not received any cash payments.
Forms 1099-INT and 1099-OID.
You should receive a copy of Form 1099-INT or Form
1099-OID from the REMIC. You will also receive a written
statement by March 15, 2001 (if you are a calendar year taxpayer),
that provides additional information. The statement should contain
enough information to enable you to figure your accrual of market
discount or amortizable bond premium.
Form 1099-INT shows the amount of interest income that
accrued to you for the period you held the regular interest.
Form 1099-OID shows the amount of OID and interest, if any,
that accrued to you for the period you held the regular interest. You
will not need to make any adjustments to the amounts reported even if
you held the regular interest for only a part of the calendar year.
However, if you bought the regular interest at a premium or
acquisition premium, see Refiguring OID shown on Form
1099-OID under Original Issue Discount (OID),
earlier.
You may not get a Form 1099.
Corporations and other persons specified in Regulation
1.6049-7(c) will not receive Forms 1099. These persons and
fiscal year taxpayers may obtain tax information by contacting the
REMIC or the issuer of the CDO, if they hold directly from the REMIC
or issuer of the CDO. Publication 938, Real Estate Mortgage
Investment Conduits (REMICs) Reporting Information, explains how
to request this information.
Publication 938 is only available on the Internet at
www.irs.gov.
If you hold a regular interest or CDO through a nominee (rather
than directly), you can request the information from the nominee in
the manner prescribed in Regulation 1.6049-7(f)(7)(i).
Allocated investment expenses of a REMIC.
Regular interest holders in a REMIC may be allowed to deduct the
REMIC's investment expenses, but only if the REMIC is a
single-class REMIC. A single-class REMIC is one that
generally would be classified as a trust for tax purposes if it had
not elected REMIC status.
The single-class REMIC will report your share of its investment
expenses in box 5 of Form 1099-INT or box 7 of Form
1099-OID. It will also include this amount in box 1 of Form
1099-INT or box 2 of Form 1099-OID, and on the additional
written statement.
You may be able to take a deduction for these expenses subject to a
2% limit that also applies to certain other miscellaneous itemized
deductions. See chapter 3
for more information.
Redemption of REMIC regular interests at maturity.
Redemption of debt instruments at their maturity is treated as a
sale or exchange. You must report redemptions on your tax return
whether or not you realize gain or loss on the transaction. Your basis
is your adjusted issue price, which includes any OID you previously
reported in income.
Any amount that you receive on the retirement of a debt instrument
is treated in the same way as if you had sold or exchanged that
instrument. A debt instrument is retired when it is reacquired or
redeemed by the issuer and canceled.
Sale or exchange of a REMIC regular interest.
Some of your gain on the sale or exchange of a REMIC regular
interest may be ordinary income. The ordinary income part, if any, is:
- The amount that would have been included in your income if
the yield to maturity on the regular interest had been 110% of the
applicable federal rate at the beginning of your holding period, minus
- The amount you included in your income.
Tax Treatment of
REMIC Residual Interests
If you acquire a residual interest in a REMIC, you must take into
account, on a quarterly basis, your daily portion of the taxable
income or net loss of the REMIC for each day during the tax year that
you hold the residual interest. You must report these amounts as
ordinary income or loss.
Basis in the residual interest.
Your basis in the residual interest is increased by the amount of
taxable income you take into account. Your basis is decreased (but not
below zero) by the amount of cash or the fair market value of any
property distributed to you, and by the amount of any net loss you
have taken into account. If you sell your residual interest, you must
adjust your basis to reflect your share of the REMIC's taxable income
or net loss immediately before the sale. See Wash Sales, in
chapter 4,
for more information about selling a residual interest.
Treatment of distributions.
You must include in your gross income the part of any distribution
that is more than your adjusted basis. Treat the distribution as a
gain from the sale or exchange of your residual interest.
Schedule Q.
If you hold a REMIC residual interest, you should receive Schedule
Q (Form 1066), Quarterly Notice to Residual Interest Holder of
REMIC Taxable Income or Net Loss Allocation, and instructions
from the REMIC each quarter. Schedule Q will indicate your share of
the REMIC's quarterly taxable income (or loss). Do not attach the
Schedule Q to your tax return. Keep it for your records.
Use Part IV of Schedule E (Form 1040) to report your total share of
the REMIC's taxable income (or loss) for each quarter included in your
tax year.
For more information about reporting your income (or loss) from a
residual interest in a REMIC, follow the Schedule Q (Form 1066) and
Schedule E (Form 1040) instructions.
Expenses.
Subject to the 2%-of-adjusted- gross-income limit, you may be able
to claim a miscellaneous itemized deduction for certain ordinary and
necessary expenses that you paid or incurred in connection with your
investment in a REMIC. These expenses may include certain expense
items incurred by the REMIC and passed through to you. The REMIC will
report these expenses to you on line 3b of Schedule Q. See chapter 3
for information on how to report these expenses.
Collateralized Debt Obligations (CDOs)
A collateralized debt obligation (CDO) is a debt
instrument, other than a REMIC regular interest, that is secured by a
pool of mortgages or other evidence of debt and that has principal
payments that are subject to acceleration. (Note: While REMIC regular
interests are collateralized debt obligations, they have unique rules
that do not apply to CDOs issued before 1987.) CDOs, also known as
"pay-through bonds," are commonly divided into different classes
(also called "tranches").
CDOs can be secured by a pool of mortgages, automobile loans,
equipment leases, or credit card receivables.
For more information about the qualifications and the tax treatment
that apply to an issuer of a CDO, see section 1272(a)(6) of the
Internal Revenue Code and the regulations under that section.
Tax treatment of CDOs.
The OID, market discount, and income-reporting rules that apply to
bonds and other debt instruments, as described earlier in this chapter under Discount on Debt Instruments, also apply to a CDO.
You must include interest income from your CDO in your gross income
under your regular method of accounting. Also include any OID accrued
on your CDO during the tax year.
Generally, you report your income from a CDO on line 8a, Form 1040.
For more information about reporting these amounts on your return, see
How To Report Interest Income, earlier.
Forms 1099-INT and 1099-OID.
You should receive a copy of Form 1099-INT or Form
1099-OID. You will also receive a written statement by March 15,
2001, that provides additional information. The statement should
contain enough information about the CDO to enable you to figure your
accrual of market discount or amortizable bond premium.
Form 1099-INT shows the amount of interest income paid to you
for the period you held the CDO.
Form 1099-OID shows the amount of OID accrued to you and the
interest, if any, paid to you for the period you held the CDO. You
should not need to make any adjustments to the amounts reported even
if you held the CDO for only a part of the calendar year. However, if
you bought the CDO at a premium or acquisition premium, see
Refiguring OID shown on Form 1099-OID under
Original Issue Discount (OID), earlier.
If you did not receive a Form 1099, see You may not get a Form
1099 under Tax Treatment of REMIC Regular Interests,
earlier.
FASITs
A financial asset securitization investment trust (FASIT)
is an entity that securitizes debt obligations such as credit
card receivables, home equity loans, and automobile loans.
A regular interest in a FASIT is treated as a debt instrument. The
rules described under Tax Treatment of CDOs, earlier, apply
to a regular interest in a FASIT, except that a holder of a regular
interest in a FASIT must use an accrual method of accounting to report
OID and interest income.
For more information about FASITs, see sections 860H through 860L
of the Internal Revenue Code.
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