Key Takeaways
- The new tax provision allows eligible lenders to exclude 25% of interest income from qualified rural or agricultural real estate loans.
- Loans must be secured by rural/agricultural property, originated after July 4, 2025, and meet strict eligibility requirements.
- There is a partial interest expense deduction limitation, partially offsetting the tax benefit.
The newly enacted tax legislation has broad-reaching impacts across industries. Here’s what banks need to know.
Community Banks and IRC Section 139L
A new tax provision, IRC Section 139L, allows certain lenders to exclude from their gross income 25% of the interest income received from qualified real estate loans that are secured by rural or agricultural property.
Eligibility
An eligible lender includes:
- Banks or savings associations with federally insured deposits
- State or federally regulated insurance companies
- Certain entities owned by bank or insurance holding companies
- Federally chartered instrumentalities established under the Farm Credit Act
For a loan to be qualified for this new partial income exclusion, it must be secured by rural or agricultural real estate and originate after the enactment of Section 139L (July 4, 2025).
The collateralized property must be used substantially for agricultural production, fishing, seafood processing, or as an aquaculture facility. Also, the real estate must be in a U.S. state or possession, and the loan must be made to a non-foreign entity to qualify for the partial income exclusion.
The Act provides that loans used to refinance pre-enactment loans (those originated before July 4, 2025) generally do not qualify for the partial income exclusion. It is not clear whether additional loan proceeds advanced on a refinanced loan would qualify for the partial exclusion.
For example, if an agriculture real estate loan is originated prior to July 4, 2025, has a balance of $100,000, and is refinanced on July 5, 2025, and an amount of $400,000 is advanced, it is not clear if the additional $300,000 advanced is considered refinancing proceeds for this purpose, or original proceeds that would qualify for the partial income exclusion. Further guidance from the Treasury would be needed on this item.
Section 265(b) Applicability
Since 25% of the interest on qualified loans is exempt from federal gross taxable income, the Act also specifically subjects the qualified loans to potential disallowance of interest expense, under IRC Sec. 265(b). This tax provision calculates an amount of interest expense allocable to assets that produce tax-exempt income, and at least partially disallows a tax deduction for the allocated interest expense.
In this case, since only 25% of the income from qualified loans is excluded from income, only 25% of the allocated interest expense is subject to the potential deduction disallowance rules. This would at least partially mitigate the tax benefit of this provision for banks.
What's Next
If your institution is involved in lending secured by rural or agricultural real estate, you may be eligible for this exclusion, provided all statutory requirements are met.
The bank must begin accounting for qualified loans during 2025 to ensure proper treatment in its tax provision calculations and 2025 tax returns.
Our experienced team of professionals can help you apply this provision to your bank or review your loan portfolio for eligibility.
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