“If a lender has maintained the servicing rights for more than 12 months, which is considered long-term, and has a significant portion of those loans in their sale, then they can take a tax position to report a portion of the tax gain as long-term capital gain as opposed to ordinary income,” said Jeff Spiegel, principal at Spiegel Accountancy Corp. “Oftentimes, this will save the lender up to 20% in federal taxes.”
When selling a portfolio, the lender should ensure that it has accurately evaluated the portfolio to take a position to report capital gains, Spiegel Accountancy Corp. said. The firm recommended that lenders do the following to substantiate their capital gain position:
Have a “reasonable basis” for capital gain filing position
Analyze and document specific facts and circumstances in determining your tax-reporting position
Obtain a third-party valuation of MSR portfolios with a separately stated value of “reasonable compensation” based on the specific portfolio, servicing costs and other factors
Disclose the tax position on Form 8275
Consider obtaining a tax opinion letter from a qualified law firm supporting your tax position.
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Spiegel Accountancy Corp., an accounting firm servicing the mortgage industry, is reminding mortgage lenders who sell MSRs to do an analysis to determine whether they can report a portion of the sale as long-term capital gains.