Tax Type
Corporation Income Tax
Description
Real Estate Mortgage Investment Conduits
Topic
Clarification
Date Issued
10-23-1987
October 23, 1987
Re: Request for Ruling; Income Tax
Real Estate Mortgage Investment Conduit
Dear *****************
This is in response to your letter of May 12, 1987, in which you request a ruling on the taxation of a Real Estate Mortgage Investment Conduit (REMIC), a new type of entity authorized by the Tax Reform Act of 1986.
Description of a REMIC
A REMIC is a new passive investment conduit entity for holding a pool of mortgages. A REMIC is prohibited from engaging in a trade or business, or from owning any property other than mortgages (with minor exceptions for cash flow investments and foreclosure property). Any entity may elect to be treated as a REMIC.
Under federal law, a federal income tax is not imposed on a REMIC unless it engages in prohibited transactions or is terminated. Holders of regular interests in a REMIC are treated as if they were holders of a debt interest. Holders of residual interests are treated as receiving the income of a REMIC after allowing a deduction for amounts paid to holders of regular interests. A federal partnership return is required to be filed for the REMIC.
Virginia Taxation of the REMIC
To the extent that a REMIC is exempt from federal income tax it will be exempt from Virginia income tax. To the extent that a REMIC is subject to federal income tax as if it were a corporation, in the event of an inadvertent termination, it will be similarly subject to Virginia corporation income tax.
For purposes of filing a Virginia return, a REMIC will be considered to have income from Virginia sources if it is managed or administered within Virginia, or if it owns real property in Virginia, including "foreclosure property" as defined in I.R.C. §860G(a)(8). A REMIC will not be considered to have income from Virginia sources if its only connections with Virginia are:
- That it owns mortgages in which the debtors are Virginia residents,
- That it owns mortgages secured by property located in Virginia, and
- That holders of its regular or residual interests are Virginia residents.
Under federal law a holder of a regular interest is treated as if he held a debt instrument. Thus payments represent principal and interest, and the holder of a regular interest will recognize gain or loss on the sale or exchange of his interest in the REMIC.
For Virginia purposes, amounts received by a holder of a regular interest will be treated as principal, interest, gain or loss to the same extent as they are treated as such amounts for federal purposes. Nonresidents and part-year residents will treat the interest, gain or loss as intangible income in the same manner as interest, gain or loss on a debt instrument would be treated.
Virginia Taxation of Holders of Residual Interests
Under federal law, the holder of a residual interest is treated as receiving a pro-rata share of the income or loss of the REMIC. Therefore similar treatment will be accorded for Virginia purposes.
The definition of "income and deductions from Virginia sources" in §58.1-302 includes the following:
-
- 1. (Omitted ).
2. Income from intangible personal property, including annuities, dividends, interest, royalties and gains from the disposition of intangible personal property to the extent that such income is from property employed by the taxpayer in a business, trade, profession, or occupation carried on in Virginia.
- 1. (Omitted ).
Therefore, the income received by a holder of a residual interest will be considered income from Virginia sources if:
- the REMIC owns any real property located in Virginia at any time during the taxable year, including foreclosure property, or
- the holder carries on a business, trade, profession, or occupation in Virginia and the REMIC investment is employed in such business.
- Nonresidents will exclude the REMIC income,
- Part-year residents will include a portion of the REMIC income based on the number of days of residence in Virginia,
- Residents will include all of the REMIC income, and
- Corporations will include all of the REMIC income, which will be apportioned if the corporation is subject to tax in at least one other state.
Sincerely,
W. H. Forst
Tax Commissioner
Rulings of the Tax Commissioner