The Treasury Department and the Internal Revenue Service are reconsidering the treatment of losses on real estate mortgage investment conduit interest-only strips when investors get hit with heavy refinancings and interest payments disappear.Currently, individual investors can deduct losses on REMIC IOs against capital gains only when the instrument is sold or terminated. However, the IRS is proposing more favorable treatment that would allow individual investors and banks to deduct IO losses against current ordinary income when refinancings reduce interest payments and the original-issue discount on the IO turns negative. The current tax rules prohibit taking negative OID into account. Treasury and IRS officials are "trying to resolve this problem, and they are coming up with approaches that would be helpful," said Ramon Camacho, a tax partner at Shaw Pittman who specializes in cross-border securitizations. "The solutions outlined in this notice are intended to prompt a meaningful dialogue, including suggestions regarding alternatives," a Treasury official said. The comment period ends Nov. 23.

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