REMICs, FASITs, and Other CDOs

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 REMIC is an entity 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. A REMIC generally is not treated as a corporation, partnership, or trust. For purposes of subtitle F of the Internal Revenue Code (Procedure and Administration), a REMIC generally is 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 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

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).

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 Form 1040 or 1040-SR, line 2b. 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. See the General Instructions for Certain Information Returns for information on when you should receive your Form 1099-INT or Form 1099-OID and a written statement providing 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 interest income that accrued to you for the period you held the regular interest.

Form 1099-OID shows 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 Refigur- ing OID shown on Form 1099-OID , earlier.

You may not get a Form 1099. Corporations and other persons specified in Regulations section 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 their interest directly from the REMIC or issuer of the CDO. Pub. 938 explains how to request this information. Go to IRS.gov/pub938 .

If you hold a regular interest or CDO through a nominee (rather than directly), you can request the information from the nominee.

Allocated investment expenses. A single-class REMIC will report your share of its investment expenses in Form 1099-INT, box 5 or Form 1099-OID, box 9. This amount is not deductible. A single-class REMIC is one that generally would be classified as a trust for tax purposes if it had not elected REMIC status.

Redemption of 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

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transaction. Your basis is your adjusted issue price, which includes any OID you previously reported in income.

Any amount you receive on the retirement of a debt instrument is treated 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 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.

Residual Interest

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.

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 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 taxable income you take into account. Your basis is decreased (but not below zero) by the cash or the fair market value of any property distributed to you, and by any net loss you have taken into account. If you sell or transfer 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 or transfer. 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 (Form 1066). If you hold a REMIC residual interest, you should receive Schedule Q (Form 1066) and instructions from the REMIC each quarter. Schedule Q (Form 1066) will indicate your share of the REMIC's quarterly taxable income (or loss).

Use Schedule E (Form 1040), Part IV, 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 Instructions for Schedule Q (Form 1066) and Schedule E (Form 1040).

Collateralized Debt Obligations (CDOs)

A 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 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 (“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) and the regulations under that section.

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 Instru- ments , 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 Form 1040 or 1040-SR, line 2b. 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 Form 1099-INT or Form 1099-OID generally by February 2, 2026. See the General Instructions for Certain Information Returns for information on when you should receive your Form 1099-INT or Form 1099-OID and a written statement providing 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 interest income paid to you for the period you held the CDO.

Form 1099-OID shows the 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 , earlier.

If you did not receive a Form 1099, see You may not get a Form 1099 , 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 Collateralized Debt

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Obligations (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.

See Code sections 860H, 860I, 860J, 860K, 860L, before repeal by PL 108–357, October 22, 2004, for more information on FASITs.

Caution: Beginning January 1, 2005, the special rules for FASITs are repealed. However, the special rules still apply to any FASIT in existence on October 22, 2004, to the extent that regular interests issued by the FASIT before that date continue to remain outstanding in accordance with the original terms of issuance.