7694 / What is a “regular interest” issued by a REMIC? How is the owner of a regular interest taxed?

Editor’s Note: The IRS provided relief to REMICs under the 2020 CARES Act. Modifications to mortgage loans held by REMICs, or REMICs that resulted from mortgage forbearance permitted under the CARES Act, were not treated as prohibited transactions under IRC Section 860F(a)(1). Forbearance-related loan modifications were also not treated as having created new mortgages. The relief applied to forbearances and all related modifications requested by borrowers between March 27 and December 31, 2020 and provided by lenders or servicers with respect to mortgage loans under forbearance programs for borrowers experiencing financial hardships caused directly or indirectly by COVID-19.¹

As a general rule, REMICs issue several classes of “regular” interests and a single class of “residual interests.” (See Q 7695 for a discussion of “residual interests.”) Regular interests are subject to federal income tax under the following rules.

An interest in a REMIC is a regular interest if it (1) was issued as a designated regular interest on the “startup day” selected by the REMIC, (2) unconditionally entitles the holder to a specified principal amount, and (3) provides for interest payments (if any) that (a) are based on a fixed rate, or, to the extent provided in regulations, at a variable rate, or (b) consist of a specified, unvarying portion of the interest payments on qualified mortgages.² See Notice 93-112 for the Service’s acceptance of a floating rate as a variable rate.³

Under regulations effective for most obligations issued on or after April 4, 1994, a variable rate includes a qualified floating rate as defined in Treasury Regulation Section 1.1275-5(b)(1). In addition, a rate equal to the highest, lowest, or average of two or more qualified floating rates is a variable rate for purposes of IRC Section 860G.