IRS guidance for property owners with federally backed mortgages brings the relief the real estate industry was hoping for.
In Revenue Procedure 2020-26, officials responded swiftly to requests for the government to ensure that a pandemic stimulus law (Public Law 116-136) allowing property owners to postpone payments on federally backed mortgages wouldn’t threaten the tax-advantaged status of investment vehicles known as real estate mortgage investment conduits, or REMICs.
Treasury and the IRS were “just accommodating the times,” said Steve Rosenthal, a senior fellow at the Tax Policy Center and former legislation counsel with the nonpartisan Joint Committee on Taxation.
“REMICs and investment trusts are supposed to buy a pool of mortgages and then not touch them, and that’s really the condition of the tax-free treatment of REMICs and investment trusts,” Rosenthal said. “It would be ironic if in the name of helping borrowers, easing the burden on borrowers, the Treasury would blow up REMICs.”
REMICs—vehicles used to pool mortgage loans—are subject to requirements involving the interests they issue, the ratio of the size of the loans to the value of the assets purchased, and their inability to take on new assets or significantly modify their current holdings. There were concerns that lawmakers’ allowing borrowers to postpone payments would change the loans and effectively make them new loans for tax purposes, and the IRS clarified that this wouldn’t be the case.
In an April 3 letter to the IRS and Treasury, the Structured Finance Association—which represents investors, brokers, ratings agencies, accounting firms, and law firms—asked for guidance.
“I think that Treasury and the IRS clearly took the concern of market participants seriously here, reacted quickly, and issued guidance that at first blush appears fairly straightforward and easily applicable to the scenarios that were described to them. So I would just commend them on their quick reaction to this,” said Jason Schwartz, a member of the association and a tax partner at Cadwalader, Wickersham & Taft LLP.