REMIC: the tax rules behind a CMBS trust, and what they mean for your loan

A REMIC (real estate mortgage investment conduit) is a federal tax election that lets a fixed pool of mortgages pass its income to bondholders without entity-level tax. Created by the Tax Reform Act of 1986 and codified at 26 U.S.C. 860A-860G, it is why CMBS loans are hard to modify or add money to, and why defeasance exists.

The statute is short: §860A says a REMIC “shall not be subject to taxation” and is not treated as a corporation, partnership or trust; its income is taxed to the holders of its interests. Everything else in Part IV of Subchapter M exists to keep that privilege for passive, fixed pools of real estate loans.

The requirements, from §860D

Under 26 U.S.C. 860D(a), an entity is a REMIC if:

1. it elects REMIC status for the year and all prior years;
2. all interests in it are regular interests or residual interests;
3. it has one, and only one, class of residual interests, paid pro rata;
4. as of the close of the third month beginning after the startup day and at all times thereafter, substantially all of its assets are qualified mortgages and permitted investments;
5. it uses a calendar taxable year; and
6. it has reasonable arrangements to keep residual interests away from disqualified organizations.

A regular interest must unconditionally entitle the holder to a specified principal amount, with interest at a fixed rate (or a variable rate the regulations allow) or a fixed portion of the mortgages’ interest (§860G(a)(1)). It is taxed as debt and holders must use the accrual method (§860B). The residual interest is everything else. In a CMBS deal, the bond classes are regular interests and Class R is the residual.

How a CMBS trust uses it: two REMICs, stacked

The BANK5 2025-5YR14 prospectus describes the usual design: “The Mortgage Loans will be held by the lower-tier REMIC,” and “the certificates will be issued by the upper-tier REMIC.” Class R “represent[s] the residual interest in each Trust REMIC” and gets no principal or interest. The certificate administrator acts as REMIC administrator, and Article X of the pooling and servicing agreement holds the additional REMIC provisions.

The four rules that reach your loan

1. The pool is fixed at the start

A qualified mortgage is an obligation “principally secured by an interest in real property” that is transferred to the REMIC on the startup day, or bought within three months under a contract in place on that day (§860G(a)(3)). A loan can be swapped for a qualified replacement mortgage only within three months of the startup day, or within two years if the original was defective (§860G(a)(4)). “Principally secured” means the real property was worth at least 80% of the loan’s adjusted issue price when it was made or when it was contributed (26 CFR 1.860G-2(a)(1)).

2. No new money

Contributions to a REMIC after the startup day are taxed at 100% of the amount, with narrow exceptions such as the first three months, clean-up calls and guarantee payments (§860G(d)). A CMBS loan cannot simply be upsized after closing. Extra proceeds come from outside the trust: see CMBS supplemental financing, mezzanine debt and preferred equity.

3. Significant modifications are off limits, unless there is a default

Under 26 CFR 1.860G-2(b), a “significant modification” of a loan after it enters the REMIC is treated as exchanging it for a new loan, and the new loan is not a qualified mortgage. The disposition of a qualified mortgage is a prohibited transaction taxed at 100% of the net income from it (§860F(a)), unless it is incident to foreclosure, default or imminent default. These changes are not significant modifications, whatever their size:

• changes “occasioned by default or a reasonably foreseeable default”;
• an assumption of the loan;
• a waiver of a due-on-sale or due-on-encumbrance clause;
• a release, substitution or addition of collateral, guarantees or credit support, or a switch between recourse and non-recourse, if the loan stays principally secured by real property.

Rev. Proc. 2009-45 adds that modification discussions “may occur at any time and need not begin only after the loan is in default,” and lets a servicer modify a performing loan if it reasonably believes, after a diligent determination, that there is a significant risk of default and the change substantially reduces it. What that means in a workout is on loan modification and CMBS loan extension.

4. Defeasance is how the lien comes off early

A REMIC that releases its lien on the real property normally loses the loan’s qualified status. The exception in 26 CFR 1.860G-2(a)(8) is defeasance: the borrower pledges substitute collateral consisting solely of government securities, the loan documents allow it, the release is to facilitate a sale or another customary commercial transaction, and the release is not within two years of the startup day. That two-year window is why CMBS loans carry a defeasance lockout after securitization; the Spiral loan in BANK5 2025-5YR14, for example, was locked out for its first 27 payments. The mechanics and costs are on defeasance and the defeasance calculator.

Foreclosure inside a REMIC

Foreclosed property can be held as “foreclosure property,” a permitted investment (§860G(a)(5)), but income from operating it can be taxable to the trust. The BANK5 prospectus notes the special servicer may let the lower-tier REMIC earn taxable “net income from foreclosure property” if it expects the after-tax result to beat other ways of operating or leasing the property. That is part of why special servicers often sell foreclosed property rather than run it for years. See CMBS deed in lieu and CMBS receivership.

What REMIC rules mean for you as a borrower

You want to	REMIC constraint	Where to read more
Borrow more on the property	No new money into the trust; any second lien also needs lender consent	Supplemental financing
Prepay early	Lien release generally only by defeasance after two years, or per your loan’s yield maintenance terms	Prepayment penalties, yield maintenance
Sell and let the buyer take the loan	Assumption is not a significant modification	Loan assumption
Release a parcel	Allowed if the loan stays principally secured, under your loan’s release terms	Partial release
Extend or restructure	Generally only with a default or reasonably foreseeable default	Loan modification, forbearance

Related: CMBS primer, master vs special servicer, CMBS vs RMBS (RMBS use REMICs too), and the glossary.

Sources: 26 U.S.C. 860A, 860B, 860D, 860F, 860G (Legal Information Institute, current text; enacted by Pub. L. 99-514, October 22, 1986); 26 CFR 1.860G-2, eCFR current text; Rev. Proc. 2009-45, IRB 2009-40; BANK5 2025-5YR14 prospectus, “Description of the Certificates”, risk factors on tax matters and foreclosure, and Annex A-3 (the Spiral). This page describes federal tax rules; it is not tax or legal advice.