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The IRS has issued Notice 2025-71 to provide taxpayers with interim guidance on the application of Section 139L, which was enacted as part of last summer’s One Big Beautiful Bill Act.
Section 139L provides that a qualified lender can exclude 25% of the interest received on any qualified real estate loan from gross income; the remaining 75% is included in gross income for a taxable year.
The statute defines a “qualified lender” as:
- A bank or savings association insured under the Federal Deposit Insurance Act
- A state- or federally regulated insurance company
- An entity wholly owned by a company that is treated as a bank holding company if such entity is organized, incorporated, or established in the U.S. or any state and the principal place of business is the U.S.
- An entity wholly owned by a company that is considered an insurance holding company if such entity is organized, incorporated, or established in the U.S. or any state; or
- With respect to interest received on a qualified real estate loan secured by real property substantially used for the production of one or more agricultural products, any federally chartered instrumentality of the U.S. established under the Farm Credit Act of 1971
A qualified lender does not have to be the original holder of the loan; subsequent holders are still able to qualify for the Section 139L exclusion if they meet the above criteria. The lender must hold a valid and enforceable security interest with respect to the secured property.
To qualify, a loan must be secured by rural or agricultural real estate or be a leasehold mortgage on rural or agricultural real estate, cannot be made to a specified foreign entity, and must be originated after July 4, 2025.
Section 139L defines rural or agricultural real estate (qualified property) as any real property in the U.S. that is substantially used for the production of one or more agricultural products; any real estate substantially used in the trade or business of fishing or seafood processing; and any land, structure or other appurtenance used for aquaculture.
A qualified lender determines whether the loan is a qualified real estate loan when the interest income is accrued. The lender will still determine the timing of interest income inclusion according to the taxpayer’s method of accounting or Section 1272.
A loan will fail to satisfy the “made after July 4, 2025” criterion — and the interest will not qualify for the exclusion — if the debt was issued on or before July 4, 2025, or if the debt results in the refinancing of a debt that was originated on or before July 4, 2025.
The amount of the loan that qualifies for Section 139L is limited to the fair market value of the qualified property securing the loan on the issue date. Therefore, if the amount of the loan is greater than the fair market value of the qualified property, only the portion of the loan that does not exceed the fair market value may be a qualified real estate loan.
Subsequent holders can compare the fair market value and the issue price of the loan on either the original issue date or the date on which the new holder acquires the loan to make this determination.
Notice 2025-71 provides for a safe harbor under which, if the fair market value of the qualified property is at least 80% of the issue price of the loan on the issue date, the entire loan is a qualified real estate loan.
Once the determination has been made that the loan is a qualified real estate loan, no retesting is needed unless there is a significant modification of the loan.
If a loan is partially refinanced, the proceeds of the loan must be split between the portion that was used to refinance the pre-enactment loan and amounts borrowed for other purposes. The portion of the new loan that exceeds the outstanding balance of the pre-enactment loan on the date of the refinancing is the portion that qualifies as a qualified real estate loan. Any interest or principal payments made as part of the refinancing should be allocated between the pre-enactment loan portion and the qualified real estate loan on a pro rata basis.
A significant modification of the qualified real estate loan is treated as a refinancing of the pre-enactment loan under Section 139L(c)(2).
Incremental borrowings on a pre-enactment loan under a line of credit or similar agreement (presumably a delayed-draw term loan) entered into on or before July 4, 2025, that allows the borrower to borrow periodically are not treated as a pre-enactment loan to the extent of the post-enactment amount. If a portion of the qualified real estate loan has pre-enactment amounts and post-enactment amounts, the borrower must allocate payments of principal and interest pro rata between loans.
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