Title 26, Internal Revenue CodeRelease 119-110
§470 Limitation on Deductions Allocable to Property Used by Governments or Other Tax-exempt Entities
Title 26 › Subtitle A — Income Taxes › CHAPTER 1 — NORMAL TAXES AND SURTAXES › Subchapter E — Accounting Periods and Methods of Accounting › PART II — METHODS OF ACCOUNTING › Subpart C — Taxable Year for Which Deductions Taken › § 470
Summary
Stops a taxpayer from taking a loss deduction in a year for property that is used by a government or other tax-exempt group. If a loss is not allowed that year, the unused loss can be taken as a deduction for that same property in the next year. Tax-exempt use loss — the amount by which deductions for a property are more than the income from that property in a year. Tax-exempt use property — property treated under section 168(h) with some specific tweaks and exceptions (partnership rules and certain intangibles are handled specially). Leases can be excluded from this rule if they meet several tests. The tests look at how much money is set aside or promised, the lessor’s real equity at risk (generally at least 20 percent of the lessor’s basis), how much loss the lessee could actually suffer (limited by 25 percent and 50 percent tests), and special rules for long-lived property and purchase options. “Allowable amount” of set-aside funds is normally 20 percent of the lessor’s basis, can be higher by regulation but never more than 50 percent, and can be zero for some arrangements. Short leases (5 years or less) skip some tests. If property used to be tax-exempt, carryovers are limited each year to the net income from that property, with any leftover carried to the next year. Rules like section 469 apply on disposition. Certain exchanges under sections 1031 and 1033 do not apply for some leased tax-exempt use property (including some leases entered before March 13, 2004). Related-party, lease-term, lender, and loan are defined, and the Treasury must write rules to allow grouping property under the same lease and to divide interest correctly.
Full Legal Text
Title 26, §470
Internal Revenue Code, Source: USLM XML via OLRC
(a)Limitation on losses
Except as otherwise provided in this section, a tax-exempt use loss for any taxable year shall not be allowed.
(b)Disallowed loss carried to next year
Any tax-exempt use loss with respect to any tax-exempt use property which is disallowed under subsection (a) for any taxable year shall be treated as a deduction with respect to such property in the next taxable year.
(c)Definitions
For purposes of this section
(1) Tax-exempt use loss
(2)Tax-exempt use property
(A)In general
The term “tax-exempt use property” has the meaning given to such term by section 168(h), except that such section shall be applied—
(i)without regard to paragraphs (1)(C) and (3) thereof, and
(ii)as if section 197 intangible property (as defined in section 197), and property described in paragraph (1)(B) or (2) of section 167(f), were tangible property.
(B)Exception for partnerships
Such term shall not include any property which would (but for this subparagraph) be tax-exempt use property solely by reason of section 168(h)(6).
(C)Cross reference
For treatment of partnerships as leases to which section 168(h) applies, see section 7701(e).
(d)Exception for certain leases
This section shall not apply to any lease of property which meets the requirements of all of the following paragraphs: (1) Availability of funds
(2)Lessor must make substantial equity investment
(A)In general
A lease of property meets the requirements of this paragraph if—
(i)the lessor—
(I)has at the time the lease is entered into an unconditional at-risk equity investment (as determined by the Secretary) in the property of at least 20 percent of the lessor’s adjusted basis in the property as of that time, and
(II)maintains such investment throughout the term of the lease, and
(ii)the fair market value of the property at the end of the lease term is reasonably expected to be equal to at least 20 percent of such basis.
(B)Risk of loss
For purposes of subparagraph (A)(ii), the fair market value at the end of the lease term shall be reduced to the extent that a person other than the lessor bears a risk of loss in the value of the property.
(C)Paragraph not to apply to short-term leases
This paragraph shall not apply to any lease with a lease term of 5 years or less.
(3)Lessee may not bear more than minimal risk of loss
(A)In general
A lease of property meets the requirements of this paragraph if there is no arrangement under which the lessee bears—
(i)any portion of the loss that would occur if the fair market value of the leased property were 25 percent less than its reasonably expected fair market value at the time the lease is terminated, or
(ii)more than 50 percent of the loss that would occur if the fair market value of the leased property at the time the lease is terminated were zero.
(B)Exception
The Secretary may by regulations provide that the requirements of this paragraph are not met where the lessee bears more than a minimal risk of loss.
(C)Paragraph not to apply to short-term leases
This paragraph shall not apply to any lease with a lease term of 5 years or less.
(4)Property with more than 7-year class life
In the case of a lease—
(A)of property with a class life (as defined in section 168(i)(1)) of more than 7 years, other than fixed-wing aircraft and vessels, and
(B)under which the lessee has the option to purchase the property,
the lease meets the requirements of this paragraph only if the purchase price under the option equals the fair market value of the property (determined at the time of exercise).
(e)Special rules
(1)Treatment of former tax-exempt use property
(A)In general
In the case of any former tax-exempt use property—
(i)any deduction allowable under subsection (b) with respect to such property for any taxable year shall be allowed only to the extent of any net income (without regard to such deduction) from such property for such taxable year, and
(ii)any portion of such unused deduction remaining after application of clause (i) shall be treated as a deduction allowable under subsection (b) with respect to such property in the next taxable year.
(B)Former tax-exempt use property
For purposes of this subsection, the term “former tax-exempt use property” means any property which—
(i)is not tax-exempt use property for the taxable year, but
(ii)was tax-exempt use property for any prior taxable year.
(2)Disposition of entire interest in property
If during the taxable year a taxpayer disposes of the taxpayer’s entire interest in tax-exempt use property (or former tax-exempt use property), rules similar to the rules of section 469(g) shall apply for purposes of this section.
(3)Coordination with section 469
This section shall be applied before the application of section 469.
(4)Coordination with section 1031 and 1033
(A)In general
section 1031(a) and 1033(a) shall not apply if—
(i)the exchanged or converted property is tax-exempt use property subject to a lease which was entered into before March 13, 2004, and which would not have met the requirements of subsection (d) had such requirements been in effect when the lease was entered into, or
(ii)the replacement property is tax-exempt use property subject to a lease which does not meet the requirements of subsection (d).
(B)Adjusted basis
In the case of property acquired by the lessor in a transaction to which section 1031 or 1033 applies, the adjusted basis of such property for purposes of this section shall be equal to the lesser of— (i)
(ii)the amount which would be the lessor’s adjusted basis if such sections did not apply to such transaction.
(f)Other definitions
For purposes of this section
(1) Related parties
(2)Lease term
The term “lease term” has the meaning given to such term by section 168(i)(3).
(3)Lender
The term “lender” means, with respect to any lease, a person that makes a loan to the lessor which is secured (or economically similar to being secured) by the lease or the leased property.
(4)Loan
The term “loan” includes any similar arrangement.
(g)Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations which—
(1)allow in appropriate cases the aggregation of property subject to the same lease, and
(2)provide for the determination of the allocation of interest expense for purposes of this section.
Legislative History
Notes & Related Subsidiaries
Editorial Notes
Amendments
2018—Subsec. (d)(2)(B). Pub. L. 115–141 substituted “subparagraph (A)(ii)” for “clause (ii)”. 2007—Subsec. (c)(2). Pub. L. 110–172, § 7(c)(1), reenacted heading without change and amended text generally. Prior to amendment, text read as follows: “The term ‘tax-exempt use property’ has the meaning given to such term by section 168(h), except that such section shall be applied— “(A) without regard to paragraphs (1)(C) and (3) thereof, and “(B) as if property described in— “(i) section 167(f)(1)(B), “(ii) section 167(f)(2), and “(iii) section 197 intangible, were tangible property. Such term shall not include property which would (but for this sentence) be tax-exempt use property solely by reason of section 168(h)(6) if any credit is allowable under section 42 or 47 with respect to such property.” Subsec. (d)(1)(A). Pub. L. 110–172, § 7(c)(2), in introductory provisions, substituted “(at all times during the lease term)” for “(at any time during the lease term)”.
Statutory Notes and Related Subsidiaries
Effective Date
of 2007 AmendmentAmendment by Pub. L. 110–172 effective as if included in the provision of the American Jobs Creation Act of 2004, Pub. L. 108–357, to which such amendment relates, see section 7(e) of Pub. L. 110–172, set out as a note under section 1092 of this title.
Effective Date
Pub. L. 108–357, title VIII, § 849, Oct. 22, 2004, 118 Stat. 1606, as amended by Pub. L. 109–135, title IV, § 403(ff), Dec. 21, 2005, 119 Stat. 2631, provided that: “(a) In General.—Except as provided in this section, the
Amendments
made by this part [part III (§§ 847–849) of subtitle B of title VIII of Pub. L. 108–357, enacting this section and amending section 167, 168, and 197 of this title] shall apply to leases entered into after
March 12, 2004, and in the case of property treated as tax-exempt use property other than by reason of a lease, to property acquired after
March 12, 2004. “(b) Exception.—“(1) In general.—The
Amendments
made by this part shall not apply to qualified transportation property. “(2) Qualified transportation property.—For purposes of paragraph (1), the term ‘qualified transportation property’ means domestic property subject to a lease with respect to which a formal application—“(A) was submitted for approval to the Federal Transit Administration (an agency of the Department of Transportation) after
June 30, 2003, and before
March 13, 2004, “(B) is approved by the Federal Transit Administration before
January 1, 2006, and “(C) includes a description of such property and the value of such property. “(3) Exchanges and conversion of tax-exempt use property.—section 470(e)(4) of the Internal Revenue Code of 1986, as added by section 848, shall apply to property exchanged or converted after the date of the enactment of this Act [Oct. 22, 2004]. “(4) Intangibles and indian tribal governments.—The
Amendments
made subsections (b)(2), (b)(3), and (e) of section 847 [amending section 167, 168, and 197 of this title], and the treatment of property described in clauses (ii) and (iii) of section 470(c)(2)(B) of the Internal Revenue Code of 1986 (as added by section 848) as tangible property, shall apply to leases entered into after October 3, 2004.”
Reference
Citations & Metadata
Citation
26 U.S.C. § 470
Title 26, Internal Revenue Code
Last Updated
Sep 22, 2026
Release point: 119-110