New proposed regulations provide guidelines for alterations to certain interests in real estate mortgage investment conduits (REMICs) and loans held by REMICs to take into account the anticipated phaseout of LIBOR, the once-dominant interbank offered rate used as the reference rate for financial contracts. The proposed regulations ensure that qualifying alterations do not cause a taxable-deemed exchange of REMIC held loans, which potentially could have negatively impacted REMIC qualification, or REMIC regular interests, and are ignored for purposes of determining qualification as a REMIC regular interest.

To qualify for the exception from deemed exchange treatment under the proposed regulations, the fair market value of the instrument after the change in reference rate must be substantially equivalent to the fair market value of the instrument before the change, taking into account any one-time payments made in connection with the change. If the new reference rate is set pursuant to arm’s-length negotiations between unrelated parties, it is presumed to be substantially equivalent in fair market value. In the case of related-party transactions, the proposed regulations provide a safe harbor to determine whether the fair market value of the altered instrument is substantially equivalent. That safe harbor generally requires that the historic average of the new reference rate not differ by more than 25 basis points compared with the rate it is replacing, taking into account any spread or adjustment to the rate and any one-time payments made in connection with the change.

Any alterations to loans held by a REMIC, or to REMIC regular interests, that are not connected to the phaseout of the LIBOR reference rate are required to be tested under the existing rules, which look to economic significance.

The proposed regulations are projected to be effective when finalized, but taxpayers are permitted to rely on the proposed regulations for periods before the finalization of the proposed regulations. This should provide taxpayers with a measure of certainty as to the US tax implications of changes that are made to conform to the anticipated phaseout of LIBOR.