SECTION 3. BACKGROUND-REMICS

.01 REMICs are widely used securitization vehicles for mortgages. REMICs are governed by sections 860A through 860G.

.02 For an entity to qualify as a REMIC, all of the interests in the entity must consist of one or more classes of regular interests and a single class of residual interests, see section 860D(a), and those interests must be issued on the startup day, within the meaning of § 1.860G–2(k) of the Income Tax Regulations.

.03 In addition to being issued on the startup day with fixed terms, a regular interest must (1) unconditionally entitle the holder to receive a specified principal amount (or other similar amount), and (2) provide that interest payments, if any, at or before maturity are based on a fixed rate (or to the extent provided in regulations, at a variable rate). See section 860G(a)(1).

.04 Under section 860D(a)(4), an entity qualifies as a REMIC only if, among other things, as of the close of the third month beginning after the startup day and at all times thereafter, substantially all of its assets consist of qualified mortgages and permitted investments. This asset test is satisfied if the entity owns no more than a de minimis amount of other assets. See § 1.860D–1(b)(3)(i). As a safe harbor, the amount of assets other than qualified mortgages and permitted investments is de minimis if the aggregate of the adjusted bases of those assets is less than one percent of the aggregate of the adjusted bases of all of the entity’s assets. Section 1.860D–1(b)(3)(ii). .05 A mortgage loan is a qualified mortgage only if it is principally secured by an interest in real property. Section 860G(a)(3)(A). .06 In general, for purposes of section 860G(a)(3)(A), an obligation is principally secured by an interest in real property only if it satisfies the “80-percent test” set forth in § 1.860G–2(a)(1)(i).

.07 Under the 80-percent test, an obligation is principally secured by an interest in real property if the fair market value of the interest in real property securing the obligation—

(1) Was at least equal to 80 percent of the adjusted issue price of the obligation at the time the obligation was originated; or

(2) Is at least equal to 80 percent of the adjusted issue price of the obligation at the

2012–3 I.R.B. 296 January 17, 2012

provides that the term “real property” means land or improvements thereon, such as buildings and that the term “real property” includes interests in real property. Section 1.856–3(d) further provides that local law definitions are not controlling for purposes of determining the meaning of the term “real property” as used in section 856 and the regulations thereunder. .04 Section 856(c)(3)(B) provides that at least 75 percent of a REIT’s gross income must be derived from certain items, including interest on obligations secured by mortgages on real property or on interests in real property.

.05 Section 1.856–5(c)(1) provides that if a mortgage covers both real property and other property, an apportionment of the interest income must be made for purposes of the 75-percent requirement of section 856(c)(3). Section 1.856–5(c)(1)(i) provides that if the loan value of the real property is equal to or exceeds the amount of the loan, the entire amount of interest income shall be apportioned to the real property. Section 1.856–5(c)(2) provides that the loan value of the real property is the fair market value of the property, determined on the date the commitment by the trust to purchase the loan or to make the loan becomes binding on the trust.

.06 Section 856(c)(5)(E) provides that for purposes of Part II of subchapter M, a regular or residual interest in a REMIC shall be treated as a real estate asset, and any amount includible in gross income with respect to such an interest shall be treated as interest on an obligation secured by a mortgage on real property, except that a REIT shall be treated as holding and receiving directly its proportionate share of the assets and income of a REMIC if less than 95 percent of the assets of such REMIC are real estate assets (determined as if the REIT held such assets). For purposes of determining whether any interest in a REMIC qualifies under the preceding sentence, any interest held by such REMIC in another REMIC shall be treated as a real estate asset under principles similar to the principles of the preceding sentence, except that, if such REMICs are part of a tiered structure, they shall be treated as one REMIC for purposes of section 856(c)(5)(E).

time the sponsor contributes the obligation to the REMIC.

.08 With limited exceptions, a mortgage loan is not a qualified mortgage unless it is transferred to the REMIC on the startup day in exchange for regular or residual interests in the REMIC. See section 860G(a)(3)(A)(i).

.09 The legislative history of the REMIC provisions indicates that Congress intended the provisions to apply only to an entity that holds a substantially fixed pool of real estate mortgages and related assets and that “has no powers to vary the composition of its mortgage assets.” S. Rep. No. 99–313, 99th Cong., 2d Sess. 791–92, 1986–3 (Vol. 3) C.B. 791–92.