The Internal Revenue Service has released a revenue procedure dealing with the tax effects on securitized mortgages that have been modified to avoid foreclosures.

Revenue Procedure 2008-28 describes conditions under which modifications of certain mortgage loans will not cause the IRS to either challenge the tax status of some types of securitization vehicles that hold the loans or to assert that the modifications create a liability for tax on a prohibited transaction. However, the IRS cautioned that no inferences should be drawn about whether there would be similar consequences when a loan modification falls outside the scope of the revenue procedure.

Many servicers of mortgage loans have developed foreclosure prevention programs, the IRS noted. They have been applying the programs both to loans that investors hold directly and to loans held through securitization vehicles such as investment trusts and real estate mortgage investment conduits. The revenue procedure goes on to describe features of both types of vehicles and gives specific examples of how the rules can be applied.

The revenue procedure governs determinations made by the IRS on or after May 16, 2008, with respect to loan modifications effected on or before Dec. 31, 2010. The IRS has invited public comment by July 15, including whether the revenue procedure should be extended to loan modifications effected after 2010.

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