Farm & Rural Real Property Loans Under OBBB: Tax Benefit for Lenders Explained

The New Rural Real Property Loan Interest Exclusion

Under section 139L of the Internal Revenue Code, added by the One, Big, Beautiful Bill Act (OBBB, Public Law 119-21), certain lenders may exclude 25% of interest income from gross income if the loan is secured by rural or agricultural real property. (irs.gov)

Key Definitions & Interim Guidance

Notice 2025-71 interim guidance clarifies:

• What qualifies as “rural or agricultural real property” (irs.gov)
• What constitutes refinancing and how it works under the exclusion rules. (irs.gov)

The IRS will rely on this interim guidance until proposed regulations are published.

Benefits & Implications for Lenders

Financial Impact

• If you make a $100,000 loan secured by qualifying farmland, $25,000 of the interest income is excluded from your gross income—reducing taxable income and saving taxes on the excluded portion.

Who Can Benefit

• Lenders with portfolios including agricultural real estate: farmers, agriculture financing companies, banks in rural regions.
• Deals where the real property collateral meets the definition set in the guidance.

How to Qualify: Actionable Steps

1. Check Property Qualification:

   • Property must be agricultural real property or rural real property.
   • Look into land usage, farming operations, or production agriculture to meet “agricultural real property” standard.
   • “Rural” is as defined in the guidance, generally areas outside certain population thresholds. (irs.gov)

2. Loan Structuring:

   • Ensure the loan is properly secured by a lien on the property.
   • Refinance rules: if you refinance, the terms and usage must align with what qualifies under the interim rules. (irs.gov)

3. Documentation & Compliance:

   • Maintain clear collateral documents, appraisals, location, and usage records.
   • Retain records showing the property meets the “rural” or “agricultural” definition.
   • Track income, interest receipts, and loan payment schedules.

4. Tax Filing Tips:

   • Exclude 25% of interest income on your income return for qualifying loans.
   • If guidance changes with final regulations, be ready to adjust or claim based on that.
   • Consult tax counsel for portfolio classification.

Example Scenario

BankOnRural makes an $80,000 loan secured by farmland located in a designated agricultural property zone. For the tax year 2025, 25% of the interest ($2,000 of $8,000 total interest) can be excluded from gross income. Proper collateral documentation and verification that the land meets “agricultural real property” criteria are essential.

Summary & Risks

While the interim guidance offers clarity, the law is new. Risks include:

• Potential revisions when final regulations are issued.
• Misclassification of property or incorrect filings could trigger IRS audits.
• Documentation lapses around “rural” definitions may harm eligibility.

But for eligible lenders, this is a powerful opportunity to reduce taxable income and support agricultural financing.