SERVICE PROVIDES 'AVERAGE AREA PURCHASE PRICE' SAFE HARBOR LIMITATIONS FOR MORTGAGE BOND ISSUERS IN U.S. TERRITORIES.

Rev. Proc. 87-19

SECTION 1. PURPOSE

The purpose of this revenue procedure is to supplement Rev. Proc. 85-42, 1985-2 C.B. 496, by adding "average area purchase price" safe harbor limitations for Guam, Puerto Rico, and the Commonwealth of the Northern Mariana Islands.

SEC. 2. BACKGROUND

01 Issuers of qualified mortgage bonds must satisfy several requirements if the interest on the bonds is to be excludable from gross income under section 103(a) of the Internal Revenue Code. One of the requirements is that the cost of each residence financed with bond proceeds must not exceed a certain percentage of the average area purchase price applicable to such residence. The average area purchase price is, with respect to any residence, 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), Pub. L. No. 99-514, section 1301, 100 Stat. 2085, 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 The Act repealed section 103A(f) and replaced it with section 143(e), which provides that the acquisition cost can not exceed 90 percent (110 percent for a targeted area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.

03 Rev. Proc. 85-42 contains a list of the average area purchase price safe harbor limitations for areas within each state and the District of Columbia. Section 3.01 of Rev. Proc. 85-42 indicates that issuers of qualified mortgage bonds may rely on the safe harbor limitations for the period beginning August 2, 1985, and ending August 1, 1986. On August 4, 1986, Announcement 86-91, 1986-31 I.R.B. 25, was published stating that issuers of qualified mortgage bonds may continue to rely on the average area purchase price safe harbor limitations contained in Rev. Proc. 85-42 until new safe harbor limitations are published.

SEC. 3. APPLICATION

The average area purchase price safe harbor limitations for jurisdictions that were not previously included in Rev. Proc. 85-42 are listed below. Issuers may continue to rely on such safe harbor limitations until new safe harbor limitations are published.

                                            AVERAGE AREA PURCHASE PRICE