New IRS guidance Offers Tax Break for Lenders in Agricultural Lending Market

On November 20, 2025, the IRS released Notice 2025-71, offering temporary guidance for a new tax provision under Section 139L of the Internal Revenue Code. This provision allows certain lenders to exclude 25% of the interest income they receive from loans secured by rural or agricultural property that were funded after July 4, 2025.

The guidance is in effect now and will apply until the IRS finalizes more detailed regulations. Here’s what lenders, and potentially borrowers, should know.

Who Can Claim the Tax Benefit?

This exclusion applies only to certain types of lenders. Borrowers don’t receive the exclusion directly, but they may see indirect effects through loan eligibility or pricing.

What Type of Property Must Secure the Loan?

For the loan to qualify for the interest exclusion, it must be secured by agricultural real estate. This includes:

• Land primarily used to grow crops, raise livestock, or produce other agricultural goods
• Property used in fishing or seafood processing businesses
• Aquaculture facilities, such as hatcheries or fish farms

The property must be located in the United States or its territories. Having a residence on the land does not disqualify it, however the property must be substantially used for farming, fishing, or aquaculture. A backyard garden, small chicken coop, or hobby-level activity typically won’t qualify.

Determining Loan Qualification

To benefit from the 25% interest income exclusion, the loan must be backed by qualifying property. In tax terms, the lender must have an enforceable security interest in the agricultural real estate. In simpler terms, the eligible property must serve as collateral for the loan.

By default, only the portion of a loan that is equal to or less than the fair market value (FMV) of the eligible property on the loan’s issue date can be treated as a qualified loan. For example, if a lender issues a loan for $100,000, but the FMV of the agricultural property is only $70,000, then only $70,000 of the loan qualifies under Section 139L. The remaining portion of interest income is not eligible for exclusion.

However, there is a safe harbor rule. If the FMV of the eligible property is at least 80% of the loan amount, then the entire loan can be treated as qualified – no need to split it. For instance, a loan of $100,000 secured by eligible farmland worth $85,000 meets the safe harbor threshold. In this case, the full loan qualifies, and the lender may exclude 25% of the interest received from the loan from their gross income.

Including Personal Property in FMV

The FMV calculation can include certain personal property used in the agricultural activity, such as tractors, livestock, or equipment, but only if:

• The lender also holds a valid security interest in that personal property, and
• The loan is still primarily secured by real estate, not just personal property.

If a farm’s land is worth $500,000, for example, and the lender also holds a security interest in $50,000 worth of farm equipment, the combined FMV used to evaluate loan qualification may be $550,000, assuming the land remains the primary collateral.

What Happens If the Property Changes or Becomes Ineligible?

If the lender later finds out the property no longer qualifies, for example, the land is no longer used for agriculture, the loan stops qualifying from that point forward. However, the IRS allows a 90-day window to correct the issue and keep the loan’s qualified status.

What If the Loan is Refinanced?

The rules for refinanced loans are more limited. If a new loan is used only to replace an old loan that was issued before July 4, 2025, it does not qualify.

If the refinance adds new principal (extra funds), that additional amount may qualify. Also,
if the refinance significantly changes the terms of the old loan, it may be treated as a new loan, but again, only the portion not tied to the original balance can qualify.

Lenders must track how much of the new loan relates to the old balance versus new funding and allocate interest accordingly.

What About the Borrower’s Use of the Loan?

The borrower’s use of the loan proceeds does not affect whether the loan qualifies. What matters is the property securing the loan, not how the funds are spent.

What’s Next?

This guidance is temporary. The IRS is currently accepting public comments and plans to issue proposed regulations in the future. In the meantime, lenders can rely on Notice 2025-71 to determine whether their loans qualify for the exclusion.

Bottom Line

Lenders who finance rural or agricultural property may be eligible to exclude 25% of interest income from those loans starting in tax year 2025, as long as the loans meet the qualifications.