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                                                                     EXHIBIT 8.1

                       [Letterhead of Giancarlo & Gnazzo]







                                                               November 19, 1996



Redwood Trust, Inc.
591 Redwood Highway
Suite 3100
Mill Valley, CA 94941


                  Re:      Redwood Trust, Inc. Shelf Registration


Dear Ladies and Gentlemen:

         You have requested our opinion in connection with the Prospectus
Supplement, dated November 19, 1996 (the "Prospectus Supplement"), to the Form
S-3 Shelf Registration Statement, dated September 19, 1996 (the "Registration
Statement") being filed by Redwood Trust, Inc. (the "Company") with respect
to 1,250,000 shares of its common stock, par value of $0.01 per share 
(the "Common Stock").

         We have acted as your special tax counsel in connection with the
Registration Statement and Prospectus Supplement, and have assisted in the
preparation of the tax summary for each such document. In formulating our
opinions, we have reviewed (i) the Registration Statement and the Prospectus
Supplement, (ii) the Articles of Incorporation of the Company, as amended and
supplemented to date, (iii) the Bylaws, as amended, of the Company, and (iv)
such resolutions, certificates, records, and other documents provided by the
Company as we have deemed necessary or appropriate as a basis for the opinions
set forth below. In addition, the Company has provided us with a certificate
(the "Officer's Certificate"), executed by a duly appointed and knowledgeable
officer of the Company, and upon which we have relied, setting forth certain
representations relating to various factual and other matters including the
prior, current and future methods of operation of the Company. We have also
relied upon the opinion of Piper & Marbury, L.L.P., dated on or about the date
hereof, with respect to certain matters of Maryland law.

         In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or other copies, and the
authenticity of the originals of such copies.

         In rendering our opinions, we have assumed that the transactions
described in or contemplated by the foregoing documents have been or will be
consummated in accordance with such operative documents, and that such documents
accurately reflect the material facts of such transactions. In addition, our
opinions are based on the correctness of the following specific assumptions: (i)
the Company has been and will continue to be organized and operated in the
manner described in the Officer's Certificate, the Registration Statement, and
the other relevant documents referred to above; and (ii) there have been no
changes in the applicable laws
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Redwood Trust, Inc.
November 19, 1996
Page 2


of the State of Maryland, the Internal Revenue Code of 1986, as amended (the
"Code"), the regulations promulgated thereunder by the Treasury Department (the
"Treasury Regulations"), and the interpretations of the Code and the Treasury
Regulations by the courts and the Internal Revenue Service, all as they exist on
the date of this letter. With respect to these assumptions, it should be noted
that (x) in the case of the former assumption, the representations set forth in
the Officer's Certificate are highly factual in nature and reflect an intention
with respect to the future conduct of the business of the Company which may not
be achievable if there are future changes in the circumstances of the Company
and (y) in the case of the latter assumption, statutes, regulations, judicial
decisions, and administrative interpretations are subject to change at any time
and, in some circumstances, with retroactive effect. Any material change that is
made after the date hereof in any of the foregoing bases for our opinions could
adversely affect our conclusions.

         Based on the foregoing, we are of the opinion that the Company has been
organized and operated in conformity with the requirements for qualification as
a "real estate investment trust" under the Code since the commencement of its
operations on August 19, 1994 through September 30, 1996, the date of the most
recent unaudited financials statements of the Company reviewed by us, and the
Company's current and contemplated methods of operation, as described in the
Registration Statement and the Prospectus Supplement, and as represented to us
by the Company, will enable it to continue to so qualify.

         Other than as expressly stated above, we express no opinion on any
issue relating to the Company or to any investment therein or under any law
other than the Federal income tax laws.

         We are furnishing this opinion to you solely in connection with the
filing of the Registration Statement and it is not to be relied upon, used,
circulated, quoted or otherwise referred to for any other purpose without our
express written permission.

         We consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to Giancarlo & Gnazzo, A
Professional Corporation under the caption "Certain Federal Income Tax
Considerations" in the Prospectus included in the Registration Statement.


                               Very truly yours,

                               /s/  Giancarlo & Gnazzo
                                    A Professional Corporation