Exclusion for interest on loans secured by agricultural real estate and rural housing

(a)

In General

Part III of subchapter B of chapter 1 of the Internal Revenue Code of 1986 (relating to items specifically excluded from gross income) is amended by inserting after section 139A the following new section:

139B.

Interest on loans secured by agricultural real estate and rural housing

(a)

Exclusion

Gross income shall not include interest received by a qualified lender on any qualified real estate loan. (b)

Definitions and special rules

For purposes of this section— (1)

Qualified lender

The term qualified lender means any bank or savings association the deposits of which are insured under the Federal Deposit Insurance Act (12 U.S.C. 1811 et seq.). (2)

Qualified real estate loan

The term qualified real estate loan means— (A)any indebtedness (including the refinancing of indebtedness) secured by agricultural real estate or by a leasehold mortgage (with a status as a lien) on agricultural real estate, or (B)any indebtedness— (i)acquired for the purpose of purchasing or improving rural housing, and (ii)secured by such rural housing or by a leasehold mortgage (with a status as a lien) on such rural housing. (3)

Agricultural real estate

(A)

In general

The term agricultural real estate means real property used or available for the production of 1 or more agricultural products. (B)

When determination made

For purposes of subparagraph (A), the determination of whether property securing any indebtedness is agricultural real estate shall be made as of the time the interest income on such indebtedness accrues. (4)

Rural housing

(A)

In general

The term rural housing means any single family residence which is located in a rural area and which is the principal residence (within the meaning of section 121) of the borrower. (B)

When determination made

The determination of whether property qualifies as rural housing with respect to any indebtedness shall be made as of the date such indebtedness originates. (5)

Rural area

The term rural area means an area (as determined by the Secretary of Agriculture) which is not within a metropolitan statistical area (as defined by the Office of Management and Budget) and which has a population (determined on the basis of the most recent decennial census for which date are available) of 2,500 or less. (c)

Coordination with section 265

For purposes of this section, the rules of section 265 shall apply, as follows: (1)

In general

Qualified real estate loans shall be treated as an obligation described in section 265(a)(2). (2)

Pro rata allocation of interest expense of financial institutions to tax-exempt interest

In applying section 265(b)— (A)the term tax-exempt obligation, as defined in paragraph (4)(B) thereof, shall include a qualified real estate loan, (B)the term financial institution, as defined in paragraph (5) thereof, shall include a qualified lender, and (C)the term qualified tax-exempt obligation, as defined in paragraph (3)(B) thereof, shall include a qualified real estate loan made after December 31, 2005, to a qualified small borrower.

For purposes of subparagraph (C), the term qualified small borrower means, with respect to qualified real estate loans received during any calendar year, any borrower if the reasonably anticipated amount of qualified real estate loans which will be received by such borrower during such calendar year does not exceed $10,000,000.

(b)

Clerical amendment

The table of sections for such part III is amended by inserting after the item relating to section 139A the following new item:

Sec. 139B. Interest on loans secured by agricultural real estate and rural housing.

(c)

Effective date

The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.