How do states apportion REMIC excess inclusion income?
Edvin Givargis Published 5 minute read
The short answer
Mostly without telling anyone how. A holder of a REMIC residual interest takes excess inclusion income into account under IRC Section 860E, and the statute's distinctive feature is a floor: taxable income can never be less than the excess inclusion, which cannot be sheltered by losses or loss carryovers. States that conform to the REMIC provisions inherit the inclusion, but almost none of them says what to do with the amount in the apportionment formula. California answered the question in Legal Ruling 2009-01: the excess inclusion is included in the base and the taxpayer's California apportionment percentage is applied to it, with the amount receiving no representation of its own in the apportionment factor. In states with no guidance, applying that same method, supported where possible by the state's treatment of unattributable intangible income and disclosed on the return, is the defensible course, and consistency across states is itself part of the defense.
What the federal statute does
A real estate mortgage investment conduit passes its income through to interest holders, and the residual interest absorbs the conduit's taxable income phantom and otherwise. Excess inclusion income is the portion of the residual holder's REMIC income that Congress decided must bear tax no matter what: under IRC Section 860E, the holder's taxable income for the year cannot be less than its excess inclusion, which means net operating losses, current losses, and most other attributes cannot offset it. The policy is anti-abuse, aimed at residual interests parked in loss entities, and the practical result is a taxpayer that may owe federal tax in a year it is otherwise deeply in losses. Every state question about excess inclusion inherits this structure: the amount arrives in federal taxable income, it resists offset, and it derives from a pool of mortgages spread across the country with no natural situs.
California's answer
California conforms to the REMIC provisions, and the Franchise Tax Board addressed the mechanics in Legal Ruling 2009-01. The ruling applies the excess inclusion floor on a post-apportioned basis: the holder includes the excess inclusion in its measure and applies its California apportionment percentage to the amount, so that California taxes only its apportioned share of the floor rather than the entire federal amount. The corollary is that the excess inclusion does not generate its own factor representation; the receipts do not enter the numerator or denominator of the sales factor, and the apportionment percentage that gets applied is the one produced by the taxpayer's other activity. The logic is sound in both directions: the income reflects a nationwide mortgage pool rather than a California activity, so giving it factor representation would distort the formula, while taxing the full unapportioned amount would reach income with no California connection at all.
The silent states
Most states offer nothing on point, and the practitioner's task is to build a method from the materials the state does have. The components are usually available. First, confirm conformity: a state that adopts IRC Sections 860A through 860E includes the excess inclusion in its base, and the floor concept comes with it. Second, look for the state's treatment of intangible income that cannot be attributed to an income producing activity. Florida is the clean example: its sales factor rule provides that business income from intangible property that cannot readily be attributed to any particular income producing activity is excluded from the numerator for every state and from the denominator as well (Florida Administrative Code Rule 12C-1.0155(1)(f)2), citing dividends, bond interest, and royalties from mere holding as illustrations. Excess inclusion income from a residual interest fits that description as well as anything does, and the rule then produces precisely the California method: income in the base, no factor representation, the taxpayer's apportionment percentage applied. Third, apply the same method in every silent state rather than optimizing state by state, because a consistent multistate methodology is both administratively coherent and far more persuasive on examination than a patchwork.
The disclosure statement
Where a state has no explicit guidance, the return should say what was done. A brief statement attached to the return, identifying the amount of excess inclusion income included in the base, noting the absence of state guidance, and describing the method as consistent with the taxpayer's other state filings and with the state's own treatment of unattributable intangible income, converts a silent position into a disclosed one. The comfort level in a silent state is realistically substantial authority rather than certainty, and disclosure is what that assessment calls for: it starts the statute of limitations running on a fully described position, blunts penalty exposure, and frames the discussion if the return is examined. The statement costs a paragraph. Reconstructing the rationale three years later, in front of an auditor holding a return that says nothing, costs considerably more.
Practice notes
The floor deserves separate attention from the apportionment. In a loss year, a state that conforms to Section 860E can produce tax on the apportioned excess inclusion even though the state return otherwise shows no income, and state NOL schedules should be built so the excess inclusion never leaks into the carryover computation. Residual interests acquired in structured finance portfolios are easy to overlook at the state level because the amounts are often modest and the K-1 reporting cryptic; a standing question in the state compliance checklist, does any entity in the group hold a REMIC residual, is the cheap control. And where the amounts are material, the state-by-state conformity check is worth doing properly, because a minority of states decouple from pieces of the federal REMIC regime or compute the base in ways that alter the floor, and the consistent multistate method should be built on the actual conformity map rather than an assumption.
This article states the law as of September 13, 2026
Statutes, rates, thresholds, and agency practice change, and a different set of facts can change the answer. Before acting on anything discussed above, contact G&G State Tax Group to confirm what has changed since this was written and how the rules apply to a specific situation.
G&G State Tax Group, LLC is a state and local tax advisory firm. The firm provides state and local tax consulting and representation in state and local tax controversies. G&G does not prepare or file tax returns, perform attest services, or provide bookkeeping, and is not a CPA firm.