New Conn. Law to ShelterMortgage Income from Tax

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To keep pace with its neighbors in Rhode Island and Massachusetts, Connecticut has enacted a law that lets banks avoid paying state taxes on mortgage income.

The law, which is to take effect Jan. 1, lets state-chartered banks and thrifts put mortgages into passive investment subsidiaries. Revenues from the subsidiaries are exempt from state tax.

The size of the tax cut will vary by institution, said Lindsey R. Pinkham, senior vice president of the Connecticut Bankers Association. At least 15 banks have told the association they are establishing passive investment units to take advantage of the law, and Mr. Pinkham said he expects more.

"There is a good appetite out there for this," said John S. Carusone, president of Bank Analysis Center, a Hartford, Conn., consulting firm. "It's an effective way to shelter some income and improve a bank's competitiveness."

Similar laws are on the books in Rhode Island and Massachusetts. Connecticut bankers warned that, without the change, some of them would have moved mortgage operations out of state.

Establishing the subsidiaries will come at a price, however. …