IRS Provides Interim Guidance on Section 139L Loans

The Department of the Treasury and the IRS issued interim guidance regarding new Section 139L of the Internal Revenue Code. This guidance addresses the partial exclusion of interest income for loans that are secured by rural or agricultural real property.

Section 139L was enacted as part of the One Big Beautiful Bill (OBBB).

This interim guidance provides answers to previous questions from banks in determining qualifications for an agricultural real estate loan to be treated as eligible for the 25% exclusion from taxable income.

Loan Amount Limitation

Only the portion of the loan up to the fair market value of the secured property (as of the issue date) qualifies.

If the loan balance exceeds the property’s fair market value, only the qualifying portion is eligible for the exclusion. For example, a loan with a balance of $1,000,000 that has qualified ag real estate collateral with a fair market value of $250,000, would only be able to partially exclude interest income from the $250,000 portion of the loan.

Subsequent holders may use either the original issue price or the adjusted issue price at the time of acquisition for valuation purposes.

Safe Harbor

If the qualifying property’s fair market value is at least 80% of the loan issue price, the entire loan is treated as qualified. So, a loan with a balance of $1,000,000 and qualified ag real estate collateral of at least $800,000 would fully qualify for the partial income exclusion of Section 139L.

Valuation Methods

Lenders may use any commercially reasonable valuation method, including those used in the ordinary course of business, to determine the fair value of the collateral.

Valuation may include the value of personal property (e.g., equipment, livestock) if the lender holds a security interest in the personal property, and the loan is substantially secured by real estate.

Thus, if the loan is at least partially collateralized by qualified ag real estate, the collateral can be increased by machinery, equipment, livestock, and other personal property to meet the safe harbor requirement discussed earlier.

Once qualified, retesting fair market value is not required unless there is a significant modification of the loan.

Good-Faith Reliance and Loss of Status

Lenders may rely on a reasonable, good-faith belief that the loan remains secured by qualified property, based on covenants or certifications from borrowers.

If the lender learns that the loan is no longer secured by qualified property, the loan loses its qualified status unless re-secured within 90 days.

Refinancings

Loans used to refinance pre-enactment loans (originated on or before July 4, 2025) are generally not treated as qualified, except for the portion exceeding the outstanding balance of the pre-enactment loan.

Significant modifications under Treasury Regulation 1.1001-3 are treated as refinancings, rather than new loans.

If new proceeds are advanced on a refinanced loan, the additional new loan proceeds are qualified for the partial income exclusion. For example, if the pre-enactment loan balance of $500,000 is refinanced by a loan that advances $650,000, the additional $150,000 is considered post-enactment new debt eligible for the Section 139L partial income exclusion. The $500,000 portion would be regarded as pre-enactment debt and not qualified for this purpose.

For a line of credit, any new proceeds advanced on a line that existed prior to July 4, 2025, would be considered qualified for Section 139L treatment.

Mixed-Use and Seasonality

Properties with intermittent agricultural use or a residence may still qualify if the substantial use requirement is met. Minimal or incidental agricultural activity does not qualify.

Next Steps

Taxpayers may rely on this interim guidance for loans made after July 4, 2025, until 30 days after proposed regulations are published.

Our team of banking and tax experts can help you understand the OBBB’s new provisions for your company.