New Tax Deduction Available for Financial Institutions. Interest on Loans Secured by Rural or Agricultural Real Property
The recently signed tax legislation, known as the One Big Beautiful Bill Act (“OBBB Act”), includes a new income exclusion of interest for many community banks. The OBBB Act added new Internal Revenue Code (IRC) Section 139L, which provides a 25% interest income exclusion from taxable income for interest received on certain loans secured by rural or agricultural real property. This alert provides a summary of this new tax deduction.
Key Provisions of IRC Section 139L
Interest Income Exclusion
- In general, 25% of the interest income received by a qualified lender on qualifying loans originated after July 4, 2025, and secured by rural or agricultural real estate, will be excluded from taxable income for federal tax purposes.
Definition of a Qualified Lender
A “qualified lender” includes:
- Any bank or savings association with deposits insured under the Federal Deposit Insurance Act
- Any state or federal regulated insurance company
- Any entity wholly owned by a company treated as a United States bank holding company
- Any entity wholly owned by a state insurance holding company
- Federal Agricultural Mortgage Corporation, but only for qualified real estate loans secured by real property used for agricultural production
Definition of a Qualified Loan
A “qualified loan” must
- Be originated after July 4, 2025
- Be made to a person other than a specified foreign entity (as defined in the legislation)
- Be secured by rural or agricultural real estate, or a leasehold mortgage (with lien status) on such property
Important Note:
A loan will not qualify if it is used to refinance a loan originally made on or before July 4, 2025, or in the case of a series of refinancings, if the original loan dates to on or before July 4, 2025.
Definition of Rural or Agricultural Real Estate
Property must meet one or more of the following:
- Substantially used for the production of agricultural products
- Substantially used in the trade or business of fishing or seafood processing
An aquaculture facility, including:
Hatchery, Rearing pond, Raceway, Pen, Incubator.
The property must be located in a State or a possession of the United States.
Interest Expense Disallowance Treatment
- For purposes of IRC Section 291 (“TEFRA disallowance”), the excluded interest income is treated as tax-exempt income.
- 25% of the basis of the qualified loan is to be included in the calculation of disallowed interest expense.
Timing of Property Qualification
The determination of whether property qualifies as rural or agricultural is made at the time the interest income is accrued.
What Should Financial Institutions Do Now?
To take advantage of the benefits under IRC Section 139L, financial institutions should:
- Work with tax providers to identify existing or potential loans that may qualify.
- Evaluate lending activity in rural and agricultural areas to determine whether to expand efforts in those markets.
- Review internal operations to ensure qualified loans and related interest are properly tracked for tax reporting.
- Assess and possibly modify procedures to maintain necessary documentation to support the deduction.
- Re-examine loan pricing to determine whether this deduction can enable more competitive interest rates.
- Monitor state compliance and conformity with the new federal tax deduction.
