--- kind: "section" citation: "26 U.S.C. § 860C" title: "26" title_heading: "Internal Revenue Code" number: "860C" heading: "Taxation of residual interests" release: "119-102" date: "2026-07-12" url: "https://uscodex.org/usc/26/860C" units: - "Subtitle A — Income Taxes" - "Chapter 1 — Normal Taxes and Surtaxes" - "Subchapter M — Regulated Investment Companies and Real Estate Investment Trusts" - "Part IV — Real Estate Mortgage Investment Conduits" --- # §860C. Taxation of residual interests - (a) **Pass-thru of income or loss—** - (1) **In general—** In determining the tax under this chapter of any holder of a [residual interest](/usc/26/860G.md?p=a-2) in a [REMIC](/usc/26/860D.md?p=a), such holder shall take into account his daily portion of the [taxable income](/usc/26/63.md?p=a) or net loss of such [REMIC](/usc/26/860D.md?p=a) for each day during the taxable year on which such holder held such [interest](/usc/26/856.md?p=f-1). - (2) **Daily portion—** The daily portion referred to in [paragraph (1)](#a-1) shall be determined— - (A) by allocating to each day in any calendar [quarter](/usc/26/430.md?p=j-4-E-vi) its ratable portion of the [taxable income](/usc/26/63.md?p=a) (or net loss) for such [quarter](/usc/26/430.md?p=j-4-E-vi), and - (B) by allocating the amount so allocated to any day among the holders (on such day) of [residual interests](/usc/26/860G.md?p=a-2) in proportion to their respective holdings on such day. - (b) **Determination of taxable income or net loss—** For purposes of this section— - (1) **Taxable income—** The [taxable income](/usc/26/63.md?p=a) of a [REMIC](/usc/26/860D.md?p=a) shall be determined under an accrual method of accounting and, except as provided in regulations, in the same manner as in the case of an individual, except that— - (A) [regular interests](/usc/26/860G.md?p=a-1) in such [REMIC](/usc/26/860D.md?p=a) (if not otherwise [debt instruments](/usc/26/1275.md?p=a-1-A)) shall be treated as indebtedness of such [REMIC](/usc/26/860D.md?p=a), - (B) [market discount](/usc/26/1278.md?p=a-2-A) on any [market discount bond](/usc/26/1278.md?p=a-1-A) shall be included in gross income for the taxable years to which it is attributable as determined under the rules of [section 1276(b)(2)](/usc/26/1276.md?p=b-2) (and sections [1276(a)](/usc/26/1276.md?p=a) and [1277](/usc/26/1277.md) shall not apply), - (C) there shall not be taken into account any item of income, gain, loss, or deduction allocable to a prohibited transaction, - (D) the deductions referred to in [section 703(a)(2)](/usc/26/703.md?p=a-2) (other than any deduction under [section 212](/usc/26/212.md)) shall not be allowed, and - (E) the amount of the [net income from foreclosure property](/usc/26/860G.md?p=c-2) (if any) shall be reduced by the amount of the tax imposed by [section 860G(c)](/usc/26/860G.md?p=c). - (2) **Net loss—** The net loss of any [REMIC](/usc/26/860D.md?p=a) is the excess of— - (A) the deductions allowable in computing the [taxable income](/usc/26/63.md?p=a) of such [REMIC](/usc/26/860D.md?p=a), over - (B) its gross income. Such amount shall be determined with the [modifications](/usc/26/424.md?p=h-3) set forth in [paragraph (1)](#b-1). - (c) **Distributions—** Any distribution by a [REMIC](/usc/26/860D.md?p=a)— - (1) shall not be included in gross income to the extent it does not exceed the adjusted basis of the [interest](/usc/26/856.md?p=f-1), and - (2) to the extent it exceeds the adjusted basis of the [interest](/usc/26/856.md?p=f-1), shall be treated as gain from the [sale or exchange](/usc/26/864.md?p=c-8-D) of such [interest](/usc/26/856.md?p=f-1). - (d) **Basis rules—** - (1) **Increase in basis—** The basis of any person’s [residual interest](/usc/26/860G.md?p=a-2) in a [REMIC](/usc/26/860D.md?p=a) shall be increased by the amount of the [taxable income](/usc/26/63.md?p=a) of such [REMIC](/usc/26/860D.md?p=a) taken into account under [subsection (a)](#a) by such person with respect to such [interest](/usc/26/856.md?p=f-1). - (2) **Decreases in basis—** The basis of any person’s [residual interest](/usc/26/860G.md?p=a-2) in a [REMIC](/usc/26/860D.md?p=a) shall be decreased (but not below zero) by the sum of the following amounts: - (A) any distributions to such person with respect to such [interest](/usc/26/856.md?p=f-1), and - (B) any net loss of such [REMIC](/usc/26/860D.md?p=a) taken into account under [subsection (a)](#a) by such person with respect to such [interest](/usc/26/856.md?p=f-1). - (e) **Special rules—** - (1) **Amounts treated as ordinary—** Any amount taken into account under [subsection (a)](#a) by any holder of a [residual interest](/usc/26/860G.md?p=a-2) in a [REMIC](/usc/26/860D.md?p=a) shall be treated as ordinary income or ordinary loss, as the case may be. - (2) **Limitation on losses—** - (A) **In general—** The amount of the net loss of any [REMIC](/usc/26/860D.md?p=a) taken into account by a holder under [subsection (a)](#a) with respect to any calendar [quarter](/usc/26/430.md?p=j-4-E-vi) shall not exceed the adjusted basis of such holder’s [residual interest](/usc/26/860G.md?p=a-2) in such [REMIC](/usc/26/860D.md?p=a) as of the close of such calendar [quarter](/usc/26/430.md?p=j-4-E-vi) (determined without regard to the adjustment under [subsection (d)(2)(B)](#d-2-B) for such calendar [quarter](/usc/26/430.md?p=j-4-E-vi)). - (B) **Indefinite carryforward—** Any loss disallowed by reason of [subparagraph (A)](#e-2-A) shall be treated as incurred by the [REMIC](/usc/26/860D.md?p=a) in the succeeding calendar [quarter](/usc/26/430.md?p=j-4-E-vi) with respect to such holder. - (3) **Cross reference—** For special treatment of income in excess of daily accruals, see section 860E. ## Source credit (Added Pub. L. 99–514, title VI, § 671(a), Oct. 22, 1986, 100 Stat. 2309; amended Pub. L. 100–647, title I, § 1006(t)(1), (8)(C), (21), Nov. 10, 1988, 102 Stat. 3419, 3421, 3426.) ## Notes ### Editorial Notes ### Amendments 1988—Subsec. (b)(1). Pub. L. 100–647, § 1006(t)(21), substituted “and, except as provided in regulations, in the same manner” for “and in the same manner” in introductory provisions. Subsec. (b)(1)(E). Pub. L. 100–647, § 1006(t)(8)(C), added subpar. (E). Subsec. (e)(1). Pub. L. 100–647, § 1006(t)(1), substituted “ordinary” for “ordinary income” in heading and amended text generally. Prior to amendment, text read as follows: “Any amount included in the gross income of any holder of a residual interest in a REMIC by reason of subsection (a) shall be treated as ordinary income.” ### Statutory Notes and Related Subsidiaries ### Effective Date of 1988 Amendment Amendment by Pub. L. 100–647 effective, except as otherwise provided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title.