The enactment of section 139L of the Internal Revenue Code (Code) by Public Law 119-21, 139 Stat. 72 (July 4, 2025), known as the One, Big, Beautiful Bill Act (OBBBA), created a new partial exclusion from gross income for certain interest received by qualified lenders. Notice 2025-71 has been issued by the Treasury Department and the Internal Revenue Service (IRS) to provide crucial interim guidance on the application of this provision. This article outlines the statutory requirements, details the administrative positions provided in the Notice, and clarifies the reliance standards for tax professionals advising qualified lenders.

Overview of Statutory Requirements

Section 139L(a) provides that a qualified lender may exclude from gross income 25 percent of the interest received on any qualified real estate loan. This provision is applicable to taxable years ending after July 4, 2025, which is the enactment date of the OBBBA.

The term qualified lender encompasses several specific entities, including:

Banks or savings associations whose deposits are insured under the Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.).
State- or federally-regulated insurance companies.
Certain entities wholly owned, directly or indirectly, by a company treated as a bank holding company for purposes of section 8 of the International Banking Act of 1978 (12 U.S.C. 3106), provided they are organized or established under U.S. or State laws and have their principal place of business in the U.S. (including territories).
Certain entities wholly owned, directly or indirectly, by a company considered an insurance holding company under State laws, provided they meet the same U.S. incorporation and principal place of business requirements.
Regarding interest received on a qualified real estate loan secured by real property substantially used for agricultural product production, any federally chartered instrumentality of the United States established under section 8.1(a) of the Farm Credit Act of 1971 (12 U.S.C. 2279aa-1(a)).

A qualified real estate loan is defined by § 139L(c)(1) as any loan secured by rural or agricultural real estate, or a leasehold mortgage (with a status as a lien) on such property; made to a person other than a specified foreign entity (§ 7701(a)(51)); and made after July 4, 2025. The determination of whether the collateral is rural or agricultural real estate must be made at the time the interest income on the loan is accrued.

Administrative Guidance on Key Definitions and Application

Notice 2025-71, in section 3, provides interim guidance that taxpayers may rely upon.

The Notice defines interest received as interest, including amounts treated as interest under the Code, that is includible in gross income by a qualified lender. This determination is made without regard to § 139L, and the timing of inclusion follows the qualified lender’s overall method of accounting (e.g., cash or accrual) or a special method, such as § 1272 for original issue discount (OID).

A qualified lender excludes 25 percent of the interest received on a qualified real estate loan in a taxable year, meaning the remaining 75 percent is included in gross income. Importantly, a qualified lender is not required to have been the original holder of the qualified real estate loan on the issue date to claim the exclusion; a subsequent qualified lender may rely on the exclusion.

The Collateral Requirement and Fair Market Value (FMV) Limitation

A loan is secured by qualified rural or agricultural property (defined as rural or agricultural real estate or a leasehold mortgage thereon) only if the qualified lender holds a valid and enforceable security interest in that property under applicable law at the time the interest income accrues.

The interim guidance establishes a limitation based on the value of the collateral: The amount of a loan treated as a qualified real estate loan is limited to the fair market value of the qualified rural or agricultural property securing the loan, determined as of the issue date of the loan. If the loan’s issue price exceeds this FMV, only the portion of the loan not exceeding the FMV is a qualified real estate loan. For instance, if a loan amount is $100x and the securing property is valued at $10x, only $10x of the loan qualifies. A subsequent holder may apply this limitation based either on the original issue date FMV and issue price, or based on the FMV and the adjusted issue price on the date the holder acquires the loan.

Safe Harbor and Valuation Methods

Notwithstanding the FMV limitation, a safe harbor provision allows a qualified lender to treat a loan as fully secured by qualified rural or agricultural property if the fair market value of the property securing the loan is at least 80 percent of the issue price of the loan on the issue date. A subsequent holder has the same flexibility to apply the safe harbor using either the original issue metrics or the metrics at the acquisition date.

Qualified lenders may determine the FMV using any commercially reasonable valuation method, which includes methods used in the ordinary course of the lender’s business for valuing loan collateral. This valuation method may incorporate expectations regarding the real estate’s production of income from the qualifying activities, such as the value of crops on the property or projected income from harvesting. Furthermore, the qualified lender may add the fair market value of related personal property (like farm equipment or livestock) to the real estate’s FMV, provided the lender holds a valid and enforceable security interest in that personal property and the loan is secured to a substantial extent by rural or agricultural real estate. Subsequent retesting of the property’s FMV is not required unless there is a subsequent significant modification under § 1.1001-3.

Operational Rules for Qualified Property and Use

The determination of whether property is rural or agricultural real estate depends on its substantial use for specified purposes (production of agricultural products, fishing/seafood processing, or as an aquaculture facility). The Notice clarifies that the presence of a residence or intermittent periods of non-use due to seasonality or fallowing does not prevent the property from qualifying, provided the substantial use requirement is met. However, property with only minimal or incidental agricultural activity, such as a small personal garden or backyard beekeeping for household use, generally would not meet the substantial use criteria.

Crucially, a borrower’s use of loan proceeds does not affect whether a loan is a qualified real estate loan; the qualification depends solely on the nature and value of the collateral.

Refinancings and Pre-Enactment Loans

The guidance addresses the application of § 139L(c)(2), which dictates that a loan is not treated as made after the enactment date (July 4, 2025) to the extent its proceeds refinance a pre-enactment loan (a debt instrument issued on or before July 4, 2025).

Partial Refinancing: If a new loan partially refinances a pre-enactment loan, only the portion of the new loan that exceeds the outstanding balance of the pre-enactment loan as of the refinancing date may be treated as a qualified real estate loan. In such cases, interest and principal payments must be allocated pro rata between the pre-enactment portion and the potential qualified real estate loan portion.
Significant Modifications: A significant modification of a pre-enactment loan, within the meaning of § 1.1001-3, is treated as a refinancing for purposes of § 139L(c)(2).
Additional Borrowings: Borrowings occurring after the enactment date that increase the principal of a pre-enactment loan (including amounts drawn under a pre-enactment line of credit) are not treated as pre-enactment loans (termed a post-enactment amount), except to the extent used to refinance the pre-enactment loan. Where the outstanding principal is mixed, payments of principal or interest must be allocated pro rata between the pre-enactment loan and the post-enactment amount.

Good-Faith Reliance and Status Loss

A qualified lender may rely on an initial determination that a loan is secured by qualified rural or agricultural property if the lender reasonably believes in good faith that the loan continues to be so secured. This belief must encompass both the continued existence of the security interest and the property’s continued qualifying use. Lenders may base this belief on covenants or certifications from the borrower or other parties with actual knowledge.

If a qualified lender later learns or has reason to believe that a loan is no longer secured, the loan loses its status as a qualified real estate loan on that date. However, the loan will not lose its status if the qualified lender, borrower, or other party ensures the loan is secured by qualified rural or agricultural property within 90 days of the date the lender learns or has reason to believe it is unsecured.

Reliance and Future Guidance

Taxpayers may rely on the interim guidance set forth in section 3 of Notice 2025-71. This reliance applies to loans made after July 4, 2025, and continues until 30 days after the forthcoming proposed regulations are published in the Federal Register.

The Treasury Department and the IRS intend to publish a notice of proposed rulemaking (forthcoming proposed regulations) addressing the § 139L exclusion. The intent is for the proposed rules to be similar to the interim guidance provided in the Notice. It is anticipated that these proposed regulations, once finalized, will apply to taxable years beginning after the final regulations are published in the Federal Register.

The IRS and Treasury have specifically requested comments on several complex technical issues, including the definition of "rural or agricultural real estate," how to apply the "substantially used" requirement, the application of rules to mixed-use properties (e.g., farmland used for events), handling changes to qualified property or collateral post-issuance, and the application of § 139L in securitization structures. Comments are also sought on the application of § 265 regarding qualified real estate loans (§ 139L(d)). Written comments are due by January 20, 2026.

The structure provided by this Notice functions like a promissory note for regulations, allowing qualified lenders to immediately benefit from the exclusion based on clear, established rules for collateral valuation and security status, thereby bridging the gap until formal, permanent guidance is promulgated.

Prepared with assistance from NotebookLM.