Details of Public Law 119-21, section 70435 , One Big Beautiful Bill Act

The provision would exclude from gross income 25 percent of the interest received by a qualified lender on any qualified real estate loan.

The provision defines “qualified lender” as (1) any bank or savings association with deposits insured under the Federal Deposit Insurance Act; (2) any State or federally regulated insurance company; (3) any entity wholly owned, directly or indirectly, by a company that is treated as a bank holding company for purposes of section 8 of the International Banking Act of 1978 ; (4) any entity wholly owned, directly or indirectly, by a company that is considered an insurance holding company under the laws of any State; and (5) with respect to interest received on a qualified real estate loan secured by real property substantially used for the production of agricultural products, any federally chartered instrumentality of the United States established under section 8.1(a) of the Farm Credit Act of 1971.

For entities under (3) and (4), above, the entity must be organized, incorporated, or established under the laws of the United States or any State and its principal place of business is in the United States or any territory of the United States.

The provision defines “qualified real estate loan” as any loan secured by rural or agricultural real estate or a leasehold mortgage on rural or agricultural real estate that is made to a person other than a specified foreign entity after July 4, 2025. For refinancings, a loan would not be treated as made after July 4, 2025, if the proceeds of the loan are used to refinance a loan that was made on or before July 4, 2025.

The provision defines “rural or agricultural real estate” as any real property which is substantially used for the production of one or more agricultural products, any real property which is substantially used in the trade or business of fishing or seafood processing, and any aquaculture facility. Aquaculture facility is defined as any land, structure or other appurtenance used for aquaculture, and includes any hatchery, rearing pond, raceway, pen, or incubator. Rural or agricultural real estate does not include any property not located in a State or a possession of the United States.

The provision provides a coordination rule with IRC section 265, which provides requirements for expenses and interest related to tax exempt income and generally disallows a deduction for interest on indebtedness that is excluded from tax. Under this rule, 25 percent of the interest on indebtedness of a qualified real estate loan would not be deductible and the basis would be reduced by 25 percent.

Under the CLT, California does not conform to IRC 139L, relating to interest on loans secured by rural or agricultural real property. Additionally, California does not conform to IRC section 265, regarding expenses and interest relating to tax-exempt income, but instead has stand-alone language that disallows certain deductions related to income not included in the measure of tax.

As a result, California does not conform to the changes made by this provision.

The estimated revenue impact to conform to the above federal provisions would result in the following loss:

26/27 27/28 28/29 29/30 ($5,000,000) ($4,600,000) ($5,800,000) ($7,300,000)