From chapter 6.3 Federal Agency products, does the following mean that Ginnie Mae, Fannie Mae, and Freddie Mac ARE or ARE NOT subject to local and state taxes? I tried to look it up, but the results were contradictory.
“Interest from U.S. government securities is typically subject to federal taxation but exempt from state and local taxes.
Interest from agency-created MBSs is fully taxable (subject to federal, state, and local taxation). The primary reason for the difference is that mortgage interest is tax-deductible to the homeowners who make their monthly payments.”
U.S. Treasury securities (like T-bills, T-notes, and T-bonds) are subject to federal tax only; they are exempt from state and local taxes.
Agency securities (like those issued by Ginnie Mae, Fannie Mae, and Freddie Mac) are fully taxable, meaning interest is subject to federal, state, and local taxes.
To answer your question directly, Ginnie Mae, Fannie Mae, and Freddie Mac securities are subject to state and local taxation. The reasoning is that mortgage interest is already tax-deductible for homeowners, so the IRS doesn’t allow a second tax break for the investors receiving those payments.
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