SECURE SOURCE OF FEDERAL TAX DEDUCTIONS
GENESIS GLOBAL CONSULTING SERVICES, LLC
SECURE SOURCE OF FEDERAL TAX DEDUCTIONS
SECURE SOURCE OF FEDERAL TAX DEDUCTIONS
SECURE SOURCE OF FEDERAL TAX DEDUCTIONS
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Disclaimer: Genesis cannot provide tax advice. No tax advice should be acted on unless based on a review of a tax return.
Genesis cannot provide accounting advice. No accounting advice should be acted on unless based on a review of a balance sheet.
Understanding Real Estate Mortgage Investment Conduits (REMICs)
A Real Estate Mortgage Investment Conduit (REMIC) is a specialized financial vehicle designed to pool mortgage loans and issue mortgage-backed securities (MBS) to investors. Established under the Tax Reform Act of 1986, REMICs play a pivotal role in the secondary mortgage market by enhancing liquidity and providing diverse investment opportunities.
Structure and Functionality
REMICs can be organized as partnerships, trusts, corporations, or associations. They assemble mortgages into pools and issue interests in these securitized mortgages to investors. These interests are often divided into tranches, each with distinct risk profiles, maturities, and yields, catering to varying investor preferences.
Tax Advantages
One of the significant benefits of REMICs is their tax-exempt status at the entity level. This means that the income generated by the REMIC is not taxed at the corporate level; instead, the tax liability passes through to the individual investors, who report the income on their tax returns. This pass-through taxation structure helps avoid the double taxation that typically affects traditional corporations.
Real Estate Mortgage Investment Conduits (“REMIC”) arise under the Internal Revenue Code of the United States. IRC §§860A-860G
A passthrough taxpayer, A “holder” directs cashflows to an “owner” using a REMIC “conduit”.
REMIC passthroughs are worth more than mortgage payments for at least three statutory reasons:
Seigniorage – profit from printing money arises as well by issuing new debt with better credit that existing debt.
The REMIC pays lower interest than do homeowners when it is “sponsored” by a Government Sponsored Entity (“GSE”) such as Freddie Mac. Reg. § 1.860F-2(a).
The REMIC collects higher interest from homeowners, sells lower interest conduits, and sells the spread at startup as conduits.
Seigniorage profit arises from selling the promise of interest payments without transferring principal in the sale price.
Deferrals – REMIC “debt instruments” tax holders pursuant to contract terms rather than as required by mortgage payments. IRC § 860B (a).
Mortgages recognize mostly interest initially, followed later by mostly tax-free return of principal.
Regular interest conduits defer tax by recognizing the same overall tax liability, just more slowly, than their collateral.
Profit comes from selling at startup the present value of deferred future tax liability.
Barter – The sponsor (Freddie Mac) of a debt-financed REMIC barters the conduits for their collateral. Reg. § 1.860F-2(a).
The tax-free “sponsorship” exchange leaves the REMIC without tax basis in its collateral: Reg. § 1.860F-2(a)(1).
All mortgage payments received by the REMIC are profit.
The value of the REMIC is the sum of seigniorage, deferrals and barter, which always exceeds the value of mortgage payments alone.
Costs arise from homeowners prepaying principal on their mortgages.
The REMIC makes no profit from selling mortgage principal as bond principal.
All profit comes from selling the promise of future mortgage interest payments.
Mortgage prepayments end profit from mortgage interest.
Almost every homeowner prepays their mortgage.
The REMIC uses its earned interest to offset the pricing errors caused by uncontrolled costs.
The REMIC can borrow because it is a taxpayer. § 860A (a) and §860F (e).
The REMIC is expressly not prohibited from borrowing. §860F (a).
The REMIC earns interest from tax prepayment in its residual conduit.
The residual conduit holder must prepay tax quarterly to recognize liability daily as required by the Tax Code. IRC § 860C (a).
The Tax Code fixes the interest rate at startup and compounds the interest quarterly. § 860E (c)(2).
The Tax Code creates capital gains by requiring earned interest to adjust the issue price of the residual conduit IRC. § 860E (c)(2).
Repaying a loan causes a loss.
The Tax Code does not distinguish between REMIC equity and retained interest as adjustments to issue price. § 860E (c).
REMIC equity offsets tax liability on capital gains, allowing both to be claimed as deductions: IRC § 860C (e)(2)(A).
The REMIC can mature both debt free and tax free once earned interest equals retained equity.
Nothing in the Tax Code requires a REMIC to mature.
Nothing prevents the REMIC from earning interest forever.
No maturity makes the synthetic value not mature.
A “special rule” in the REMICs Act disregards the reduction to the tax basis of the residual conduit caused by loss in the same quarter as income. IRC § 860C (a)(2)(A).
Income earned by the REMIC experiences taxation at a 100% rate when contributed to the residual conduit. IRC § 860G (d)(1).
The tax repays any loan from the U.S. Treasury.
The “special rule” limits basis to income taxed while disregarding the reduction to basis caused by loan repayment loss.
Repaying the REMIC’s loan causes the residual conduit to recognize both income and loss in the same quarter, netting a loss having basis.
IRC § 860A (a) states explicitly that the REMIC is not a partnership nor a corporation, and IRC § 465 limit deductions to an aggregate amount with respect to only which a partnership or corporation is “at risk.”
After years of research, looking into every aspect of these "REMIC" deductions, Genesis Global Consulting Services has a decade of successfully helping clients legally reduce costs related to income.
Contact Genesis to find out more and to see if you qualify for these deductions.
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