601.201 BONDS USED TO FINANCE HOMES IN GUAM AND PUERTO RICO.

Rev. Proc. 89-27

SECTION 1. PURPOSE

This revenue procedure supplements Rev. Proc. 88-48, 1988-39 I.R.B. 39, by adding "average area purchase price" safe harbor limitations for Guam and Puerto Rico.

SEC. 2. BACKGROUND

01 Issuers of qualified mortgage bonds, as defined in section 143(a) of the Internal Revenue Code, and mortgage credit certificates, as defined in section 25(c), must satisfy several requirements if the interest on the bonds is to be excludable from gross income under section 103(a) or the credit attributable to the certificates is to be allowable against federal income tax. One of the requirements is that the cost of each residence financed must not exceed a certain percentage of the average area purchase price applicable to such residence. The average area purchase price with respect to any residence is the average purchase price of single- family residences in the statistical area in which the residence is located that were purchased during the most recent 12-month period for which sufficient statistical information is available.

02 Prior to the enactment of the Tax Reform Act of 1986 (Act), section 1301, 1986-3 (Vol. 1) C.B. 519, former section 103A(f) of the Code provided that the acquisition cost of each residence could not exceed 110 percent (120 percent for a targeted area residence) of the average area purchase price. The Act repealed section 103A(f) and replaced it with section 143(e), which provides that the acquisition cost can not exceed 90 percent (110 percent for a targeted area residence) of the average area purchase price. The Act generally is effective with respect to bonds issued after August 15, 1986. The Technical and Miscellaneous Revenue Act of 1988, Pub. L. No. 100-647, section 4005(a), 102 Stat. 3342, extended the qualified mortgage bond provisions under section 143(a) and the mortgage credit certificate provisions under section 25(c) through December 31, 1989.

03 Rev. Proc. 85-42, 1985-2 C.B. 496, as originally published, contained a list of the average area purchase price safe harbor limitations for areas within each state and the District of Columbia. Rev. Proc. 87-19, 1987-1 C.B. 712, supplemented Rev. Proc. 85-42 by adding safe harbor limitations for Guam, Puerto Rico, and the Commonwealth of the Northern Mariana Islands. The portion of Rev. Proc. 85-42 concerning safe harbor limitations for the states and the District of Columbia was obsoleted by Rev. Proc. 87-20, 1987-1 C.B. 713. Rev. Proc. 87-20 was obsoleted by Rev. Proc. 88-48. Section 3 of Rev. Proc. 87-19 provides that the safe harbor limitations for Guam, Puerto Rico, and the Commonwealth of the Northern Mariana Islands published in Rev. Proc. 87-19 may be relied on until new safe harbor limitations are published.

SEC. 3. APPLICATION AND EFFECTIVE DATE

01 The average area purchase price safe harbor limitations for Guam and Puerto Rico are contained in this revenue procedure. Issuers may continue to rely on these safe harbor limitations until they are rendered obsolete by a new revenue procedure.

02 Issuers of qualified mortgage bonds and mortgage credit certificates for residences in Guam and Puerto Rico may rely on the average area purchase price safe harbor limitations contained in this revenue procedure for the period beginning April 10, 1989, the date of publication of this revenue procedure in the Internal Revenue Bulletin, and ending on the date that such safe harbor limitations are rendered obsolete by a new revenue procedure.

03 Issuers may continue to rely on the average area purchase price safe harbor limitations for new residences in Puerto Rico added to Rev. Proc. 85-42 by Rev. Proc. 87-19 for mortgage bonds sold before May 10, 1989, 30 days after publication of this revenue procedure in the Internal Revenue Bulletin, if the commitments to provide financing for the mortgages are made before July 9, 1989, 90 days after publication of this revenue procedure in the Internal Revenue Bulletin.

04 Issuers of mortgage credit certificates may continue to rely on the average area purchase price safe harbor limitations for new residences in Puerto Rico added to Rev. Proc. 85-42 by Rev. Proc. 87- 19 for certificates issued with respect to bond authority exchanged before May 10, 1989, 30 days after publication of this revenue procedure in the Internal Revenue Bulletin, if commitments to issue the certificates are made before July 9, 1989, 90 days after publication of this revenue procedure in the Internal Revenue Bulletin.

05 The issuers of qualified mortgage bonds and mortgage credit certificates in the Commonwealth of the Northern Mariana Islands may cntinue to rely on the average area purchase price safe harbor limitations are published for that jurisdiction.

06 The average area purchase price safe harbor limitations, which are set forth below, have not been adjusted to reflect either the 90 percent of the average area purchase price described in section 143(e)(1) of the Code or the 110 percent of the average area purchase price described in section 143(e)(5).

                                AVERAGE AREA PURCHASE PRICE SAFE HARBOR

Rev. Proc. 88-48 is supplemented, and Rev. Proc. 85-42, as supplemented by Rev. Proc. 87-19, is obsoleted except as provided in section 3.05 of this revenue procedure.

DRAFTING INFORMATION

The principal author of this revenue procedure is Gene Overton of the Office of Assistant Chief Counsel (Financial Institutions & Products). For further information regarding this revenue procedure contact Mr. Overton on (202) 566-4310 (not a toll-free call).