New IRS Guidance for Lenders on Loans Secured by Farm and Rural Property: What Section 139L Means for 2025 and Beyond

The IRS has released Notice 2025-71, providing interim guidance on a powerful new tax benefit created under the One, Big, Beautiful Bill Act (OBBBA). Beginning in tax years ending after July 4, 2025, certain lenders may exclude 25% of the interest income they receive from qualifying loans secured by rural or agricultural real property.

This new deduction, codified in Internal Revenue Code § 139L, is designed to expand access to agricultural credit, lower financing costs for rural borrowers, and encourage lending to farms, fisheries, and other agricultural operations.

The IRS is still drafting full proposed regulations, but Notice 2025-71 provides detailed interim rules that lenders may rely on immediately. Below is an overview of what lenders, tax professionals, and agricultural finance institutions need to know.

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1. A New 25% Interest Exclusion for Qualified Lenders

Under §139L, qualified lenders may exclude 25% of interest received on a qualified real estate loan from gross income.

This exclusion applies annually and can significantly reduce taxable revenue for lenders active in farm and rural credit markets.

Who qualifies as a "qualified lender"?

Eligible lenders include:

• FDIC-insured banks and savings associations

• State- or federally-regulated insurance companies

• Entities owned by bank holding companies

• Entities owned by insurance holding companies

• Farm Credit System institutions for loans secured by agricultural production property

Importantly, the lender does not need to be the original loan holder. Subsequent purchasers of qualified loans also qualify.

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2. What Counts as a Qualified Real Estate Loan?

A loan qualifies only if it is:

• Secured by rural or agricultural real estate,

• Made after July 4, 2025, and

• Not made to a specified foreign entity.

Defining "rural or agricultural real estate"

Under §139L(c)(3), qualifying property includes:

• Land substantially used to produce agricultural products

• Property used in fishing or seafood processing

• Aquaculture facilities, including hatcheries and pens

• Leasehold mortgages on qualifying property

Property must be located in the United States or its possessions.

Mixed-use and seasonal use rules

A property may still qualify even if:

• It has a residence on it

• It experiences seasonal fallowing

• Agricultural activity pauses due to normal operating cycles

However, property with only incidental agricultural activity, such as hobby gardens or backyard livestock, does not qualify.

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3. Loan-to-Value and Collateral Requirements

To qualify for the 25% exclusion, a lender must have a valid, enforceable security interest in the rural or agricultural property at the time interest accrues.

General valuation rule

Only the portion of a loan up to the fair market value (FMV) of the qualifying property may be treated as a qualified loan.

If a $100 million loan is secured by property valued at $10 million, only the $10 million portion qualifies.

The 80% Safe Harbor

A key feature of Notice 2025-71:

If the FMV of the agricultural property is at least 80% of the loan amount at issuance, the entire loan can be treated as qualified.

This safe harbor gives lenders a practical path to qualify full loan amounts without complex multi-asset valuation.

Valuation flexibility

Lenders may determine FMV using any commercially reasonable method, including methods already used in the ordinary course of business. Valuations may also include certain farm equipment or livestock securing the loan.

No ongoing retesting is required unless the loan undergoes a significant modification.

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4. Special Rules for Refinancings and Pre-Enactment Loans

Section 139L applies only to new lending, but refinancings require careful analysis.

Pre-enactment loans

Any loan issued on or before July 4, 2025 is considered a "pre-enactment loan" and does not qualify.

Partial refinancings

If a new loan is used partly to refinance pre-enactment debt and partly for new funds, only the new money portion can qualify for the 25% interest exclusion.

Interest and principal payments must then be pro-rated between the two buckets.

Significant loan modifications

A significant modification (per Reg. §1.1001-3) is treated as a refinancing for §139L purposes.

This prevents lenders from requalifying old loans through paperwork adjustments.

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5. Documentation, Compliance, and Good-Faith Reliance

Notice 2025-71 allows lenders to rely on:

• Borrower certifications

• Loan covenants

• Existing collateral documents

• Reasonable, good-faith beliefs about property use

If a lender discovers the property no longer qualifies, they have 90 days to restore eligibility before the loan loses qualified status.

This good-faith reliance rule is essential for reducing audit risk.

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6. The IRS Is Seeking Public Comment

The IRS is accepting comments on key issues, including:

• How to define agricultural use

• Treatment of mixed-use properties

• Whether seasonality should be further clarified

• Application of §139L to securitization structures

• Interaction with §265 (interest disallowance)

Comments may be submitted electronically at Regulations.gov using docket IRS-2025-0400, or by mail.

This feedback will help shape the full proposed regulations.

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How Margen Helps Lenders Apply Section 139L Correctly

The new §139L rules introduce detailed requirements around collateral valuation, refinancing, loan qualification, and good-faith reliance. Margen helps lenders, tax teams, and agricultural finance professionals apply these rules correctly by answering questions like:

"Does this loan qualify for the 25% interest exclusion under §139L?"

"How do I apply the 80% FMV safe harbor to a mixed-collateral loan?"

"If part of a refinancing relates to pre-2025 debt, how much interest is eligible?"

"What evidence do I need to document that the property is 'substantially used' for agriculture?"

Margen analyzes loan terms, collateral descriptions, valuation records, and borrower certifications using the latest IRS guidance, helping lenders maximize their §139L benefit while maintaining full compliance.

For full details, see IRS Notice 2025-71.