The US Department of the Treasury and IRS have introduced new guidelines for a tax break for lenders who offer loans secured by rural or agricultural property.
This benefit, created under a new law (Section 139L), allows lenders to exclude 25% of the interest they earn from these loans from their taxable income. The interim rules, which taxpayers can follow for now, are in effect until new regulations are finalised.
What is the tax benefit?
The new rule allows qualified lenders to exclude 25% of the interest income they earn from loans secured by rural or agricultural land from their gross income.
This applies to loans made after July 4, 2025. The remaining 75% of the interest is still taxable.
Who will be benefited?
To qualify for this tax break, the lender must meet specific criteria:
Qualified lenders: This includes banks, savings associations, insurance companies, and other entities that meet specific federal requirements.
Qualified loans: The loans must be secured by rural or agricultural real estate—such as farms, ranches, or properties used for aquaculture (fish farming).
Key points from the interim guidelines
Interest exclusion: Lenders can exclude 25% of the interest on loans secured by rural or agricultural property. They must include the other 75% of the interest in their income.
Refinancing rules: If a new loan refinances an older one, the interest exclusion only applies to the portion of the new loan that is above the original loan amount.
Loan amount limit: The total loan amount eligible for the exclusion is limited to the fair market value of the rural or agricultural property securing the loan. If the loan exceeds the property’s value, only the part that matches the property value qualifies for the tax break.
Safe harbour for loan security: There is a “safe harbour” rule where a lender can treat the entire loan as qualified if the property securing it is worth at least 80% of the loan amount.
Subsequent loan holders: Lenders who buy loans from other lenders can also claim the interest exclusion if the loan meets the criteria. A property must be mainly used for farming, ranching, or aquaculture to qualify. Small personal gardens or non-agricultural uses won’t count.
Lenders don’t need to be the original holder of the loan to take advantage of this tax break. They just need to be a qualified lender when the interest is earned.
When will this apply?
The guidance is available now, and taxpayers can use it until the final regulations are published. Once the regulations are finalised, they will apply to taxable years starting after the final rules are issued.
The public has until January 20, 2026 to submit comments on the guidance. This tax benefit is designed to help lenders make it easier to finance rural and agricultural properties, ultimately supporting farming and related industries.