A Primer on Select U.S. Tax Considerations for ABS Sponsors and Investors

Abstract

In order to properly assess the income tax effect of a given ABS structure, it is essential to understand the timing, character, and source of the taxable income or loss that may result from the transaction. In such an analysis, important considerations include the type of transaction, whether the securities constitute debt or equity for tax purposes, and whether the sponsor has issued any of the equity to a third-party investor. The author discusses these considerations, statutory alternatives for mortgage loan securitizations, and tax accounting for the sponsor's gain on sale, stated interest, original issue discount, market discount, and premium.