What this line means
Your share of net income from a real estate mortgage investment conduit (REMIC) in which you hold a residual interest. REMICs are entities that hold pools of mortgages and issue mortgage-backed securities. If you own a residual interest (as opposed to a regular interest), you report the income here using Schedule Q (Form 1066) provided by the REMIC. Regular interest holders report their income as interest on Schedule B — only residual interest holders use Part IV of Schedule E.
Does this apply to you?
- You hold a residual interest in a REMIC and received a Schedule Q (Form 1066)
- You invested in a mortgage-backed security structured as a REMIC residual interest
- You are a partner in a partnership that holds REMIC residual interests and passed the income through to you on Schedule K-1
Easy to overlook
Taxable income from a REMIC can exceed cash distributions REMIC residual interest holders are taxed on their share of the REMIC’s taxable income, which is often larger than the actual cash distributions received. The excess taxable income (phantom income) still must be reported on line 38. This creates a tax liability with no corresponding cash to pay it. The Schedule Q shows both the taxable income and the cash distributions — these two numbers are rarely the same. 1 IRS Schedule E instructions — Line 38
Excess inclusion income has special tax rules A portion of REMIC residual interest income is classified as “excess inclusion income.” This income cannot be offset by net operating losses, is always treated as unrelated business taxable income (UBTI) if held by a tax-exempt entity, and is subject to tax at the highest marginal rate if allocated to a foreign holder. For individual holders, the excess inclusion amount on Schedule Q must be identified separately because it cannot be sheltered by deductions that would otherwise reduce taxable income. 2 IRS Schedule Q (Form 1066) instructions — REMIC residual interest reporting
Watch out for this
Confusing REMIC regular interests with residual interests. If you own a regular interest in a REMIC (the more common type for individual investors), you report the income as interest on Schedule B, not on Schedule E Part IV. Only residual interests — which carry the right to receive the REMIC’s surplus cash flow after all regular interest obligations are paid — go on line 38. The type of interest is stated on Schedule Q or in the investment documents.
Footnotes
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IRS Schedule E (Form 1040) Instructions, Line 38. https://www.irs.gov/instructions/i1040se ↩
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IRS Schedule Q (Form 1066) Instructions, Excess Inclusion Income. https://www.irs.gov/instructions/i1066 ↩