---
kind: "section"
citation: "26 U.S.C. § 470"
title: "26"
title_heading: "Internal Revenue Code"
number: "470"
heading: "Limitation on deductions allocable to property used by governments or other tax-exempt entities"
release: "119-102"
date: "2026-07-12"
url: "https://uscodex.org/usc/26/470"
units:
  - "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. Limitation on deductions allocable to property used by governments or other tax-exempt entities

- (a) **Limitation on losses—** Except as otherwise provided in this section, a [tax-exempt](/usc/26/150.md?p=a-6) use loss for any taxable year shall not be allowed.
- (b) **Disallowed loss carried to next year—** Any [tax-exempt](/usc/26/150.md?p=a-6) use loss with respect to any [tax-exempt](/usc/26/150.md?p=a-6) use [property](/usc/26/317.md?p=a) which is disallowed under [subsection (a)](#a) for any taxable year shall be treated as a deduction with respect to such [property](/usc/26/317.md?p=a) in the next taxable year.
- (c) **Definitions—** For purposes of this section—
  - (1) **Tax-exempt use loss—** The term “[tax-exempt](/usc/26/150.md?p=a-6) use loss” means, with respect to any taxable year, the amount (if any) by which—
    - (A) the sum of—
      - (i) the aggregate deductions (other than [interest](/usc/26/856.md?p=f-1)) directly allocable to a [tax-exempt](/usc/26/150.md?p=a-6) use [property](/usc/26/317.md?p=a), plus
      - (ii) the aggregate deductions for [interest](/usc/26/856.md?p=f-1) properly allocable to such [property](/usc/26/317.md?p=a), exceed
    - (B) the aggregate income from such [property](/usc/26/317.md?p=a).
  - (2) **Tax-exempt use property—**
    - (A) **In general—** The term “[tax-exempt](/usc/26/150.md?p=a-6) use [property](/usc/26/317.md?p=a)” has the meaning given to such term by [section 168(h)](/usc/26/168.md?p=h), except that such section shall be applied—
      - (i) without regard to paragraphs (1)(C) and (3) thereof, and
      - (ii) as if [section 197](/usc/26/197.md) intangible [property](/usc/26/317.md?p=a) (as defined in [section 197](/usc/26/197.md)), and [property](/usc/26/317.md?p=a) described in paragraph [(1)(B)](/usc/26/167.md?p=f-1-B) or [(2)](/usc/26/167.md?p=f-2) of section 167(f), were tangible [property](/usc/26/317.md?p=a).
    - (B) **Exception for partnerships—** Such term shall not include any [property](/usc/26/317.md?p=a) which would (but for this subparagraph) be [tax-exempt](/usc/26/150.md?p=a-6) use [property](/usc/26/317.md?p=a) solely by reason of [section 168(h)(6)](/usc/26/168.md?p=h-6).
    - (C) **Cross reference—** For treatment of [partnerships](/usc/26/761.md?p=a) as leases to which [section 168(h)](/usc/26/168.md?p=h) applies, see [section 7701(e)](/usc/26/7701.md?p=e).
- (d) **Exception for certain leases—** This section shall not apply to any lease of [property](/usc/26/317.md?p=a) which meets the requirements of all of the following paragraphs:
  - (1) **Availability of funds—**
    - (A) **In general—** A lease of [property](/usc/26/317.md?p=a) meets the requirements of this paragraph if (at all times during the lease term) not more than an allowable amount of [funds](/usc/26/851.md?p=g-2) are—
      - (i) subject to any arrangement referred to in [subparagraph (B)](#d-1-B), or
      - (ii) set aside or expected to be set aside,

      to or for the benefit of the lessor or any lender, or to or for the benefit of the lessee to satisfy the lessee’s obligations or options under the lease. For purposes of [clause (ii)](#d-1-A-ii), [funds](/usc/26/851.md?p=g-2) shall be treated as set aside or expected to be set aside only if a reasonable person would conclude, based on the facts and circumstances, that such [funds](/usc/26/851.md?p=g-2) are set aside or expected to be set aside.

    - (B) **Arrangements—** The arrangements referred to in this subparagraph include a defeasance arrangement, a loan by the lessee to the lessor or any lender, a deposit arrangement, a letter of credit collateralized with [cash](/usc/26/856.md?p=c-5-K) or [cash](/usc/26/856.md?p=c-5-K) equivalents, a payment undertaking agreement, prepaid rent (within the meaning of the regulations under [section 467](/usc/26/467.md)), a sinking [fund](/usc/26/851.md?p=g-2) arrangement, a guaranteed investment [contract](/usc/26/101.md?p=f-3-A), financial guaranty insurance, and any similar arrangement (whether or not such arrangement provides credit [support](/usc/26/509.md?p=d)).
    - (C) **Allowable amount—**
      - (i) **In general—** Except as otherwise provided in this subparagraph, the term “allowable amount” means an amount equal to 20 percent of the lessor’s adjusted basis in the [property](/usc/26/317.md?p=a) at the time the lease is entered into.
      - (ii) **Higher amount permitted in certain cases—** To the extent provided in regulations, a higher percentage shall be permitted under [clause (i)](#d-1-C-i) where necessary because of the credit-worthiness of the lessee. In no event may such regulations permit a percentage of more than 50 percent.
      - (iii) **Option to purchase—** If under the lease the lessee has the option to [purchase](/usc/26/1361.md?p=e-1-C) the [property](/usc/26/317.md?p=a) for a fixed price or for other than the fair market [value](/usc/26/851.md?p=c-4) of the [property](/usc/26/317.md?p=a) (determined at the time of exercise), the allowable amount at the time such option may be exercised may not exceed 50 percent of the price at which such option may be exercised.
      - (iv) **No allowable amount for certain arrangements—** The allowable amount shall be zero with respect to any arrangement which involves—
        - (I) a loan from the lessee to the lessor or a lender,
        - (II) any deposit received, letter of credit issued, or payment undertaking agreement entered into by a lender otherwise involved in the transaction, or
        - (III) in the case of a transaction which involves a lender, any credit [support](/usc/26/509.md?p=d) made available to the lessor in which any such lender does not have a claim that is senior to the lessor.

      For purposes of subclause (I), the term “loan” shall not include any amount treated as a loan under [section 467](/usc/26/467.md) with respect to a [section 467](/usc/26/467.md) rental agreement.

  - (2) **Lessor must make substantial equity investment—**
    - (A) **In general—** A lease of [property](/usc/26/317.md?p=a) 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](/usc/26/317.md?p=a) of at least 20 percent of the lessor’s adjusted basis in the [property](/usc/26/317.md?p=a) as of that time, and
        - (II) maintains such investment throughout the term of the lease, and
      - (ii) the fair market [value](/usc/26/851.md?p=c-4) of the [property](/usc/26/317.md?p=a) 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)](#d-2-A-ii), the fair market [value](/usc/26/851.md?p=c-4) 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](/usc/26/851.md?p=c-4) of the [property](/usc/26/317.md?p=a).
    - (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](/usc/26/317.md?p=a) 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](/usc/26/851.md?p=c-4) of the leased [property](/usc/26/317.md?p=a) were 25 percent less than its reasonably expected fair market [value](/usc/26/851.md?p=c-4) at the time the lease is terminated, or
      - (ii) more than 50 percent of the loss that would occur if the fair market [value](/usc/26/851.md?p=c-4) of the leased [property](/usc/26/317.md?p=a) 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](/usc/26/317.md?p=a) with a class life (as defined in [section 168(i)(1)](/usc/26/168.md?p=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](/usc/26/1361.md?p=e-1-C) the [property](/usc/26/317.md?p=a),

    the lease meets the requirements of this paragraph only if the [purchase](/usc/26/1361.md?p=e-1-C) price under the option equals the fair market [value](/usc/26/851.md?p=c-4) of the [property](/usc/26/317.md?p=a) (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](/usc/26/150.md?p=a-6) use [property](/usc/26/317.md?p=a)—
      - (i) any deduction allowable under [subsection (b)](#b) with respect to such [property](/usc/26/317.md?p=a) for any taxable year shall be allowed only to the extent of any net income (without regard to such deduction) from such [property](/usc/26/317.md?p=a) for such taxable year, and
      - (ii) any portion of such unused deduction remaining after application of [clause (i)](#e-1-A-i) shall be treated as a deduction allowable under [subsection (b)](#b) with respect to such [property](/usc/26/317.md?p=a) in the next taxable year.
    - (B) **Former tax-exempt use property—** For purposes of this subsection, the term “former [tax-exempt](/usc/26/150.md?p=a-6) use [property](/usc/26/317.md?p=a)” means any [property](/usc/26/317.md?p=a) which—
      - (i) is not [tax-exempt](/usc/26/150.md?p=a-6) use [property](/usc/26/317.md?p=a) for the taxable year, but
      - (ii) was [tax-exempt](/usc/26/150.md?p=a-6) use [property](/usc/26/317.md?p=a) for any prior taxable year.
  - (2) **Disposition of entire interest in property—** If during the taxable year a [taxpayer](/usc/26/1313.md?p=b) disposes of the [taxpayer](/usc/26/1313.md?p=b)’s entire [interest](/usc/26/856.md?p=f-1) in [tax-exempt](/usc/26/150.md?p=a-6) use [property](/usc/26/317.md?p=a) (or former [tax-exempt](/usc/26/150.md?p=a-6) use [property](/usc/26/317.md?p=a)), rules similar to the rules of [section 469(g)](/usc/26/469.md?p=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 sections 1031 and 1033—**
    - (A) **In general—** Sections [1031(a)](/usc/26/1031.md?p=a) and [1033(a)](/usc/26/1033.md?p=a) shall not apply if—
      - (i) the exchanged or converted [property](/usc/26/317.md?p=a) is [tax-exempt](/usc/26/150.md?p=a-6) use [property](/usc/26/317.md?p=a) subject to a lease which was entered into before March 13, 2004, and which would not have met the requirements of [subsection (d)](#d) had such requirements been in effect when the lease was entered into, or
      - (ii) the replacement [property](/usc/26/317.md?p=a) is [tax-exempt](/usc/26/150.md?p=a-6) use [property](/usc/26/317.md?p=a) subject to a lease which does not meet the requirements of [subsection (d)](#d).
    - (B) **Adjusted basis—** In the case of [property](/usc/26/317.md?p=a) acquired by the lessor in a transaction to which section [1031](/usc/26/1031.md) or [1033](/usc/26/1033.md) applies, the adjusted basis of such [property](/usc/26/317.md?p=a) for purposes of this section shall be equal to the lesser of—
      - (i) the fair market [value](/usc/26/851.md?p=c-4) of the [property](/usc/26/317.md?p=a) as of the beginning of the lease term, or
      - (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—** The terms “lessor”, “lessee”, and “lender” each include any related party (within the meaning of [section 197(f)(9)(C)(i)](/usc/26/197.md?p=f-9-C-i)).
  - (2) **Lease term—** The term “lease term” has the meaning given to such term by [section 168(i)(3)](/usc/26/168.md?p=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](/usc/26/317.md?p=a).
  - (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](/usc/26/317.md?p=a) subject to the same lease, and
  - (2) provide for the [determination](/usc/26/1313.md?p=a) of the allocation of [interest](/usc/26/856.md?p=f-1) expense for purposes of this section.

## Source credit

(Added Pub. L. 108–357, title VIII, § 848(a), Oct. 22, 2004, 118 Stat. 1602; amended Pub. L. 110–172, § 7(c), Dec. 29, 2007, 121 Stat. 2482; Pub. L. 115–141, div. U, title IV, § 401(a)(120), Mar. 23, 2018, 132 Stat. 1190.)

## Notes

### 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 Amendment

Amendment 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: 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 sections 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.Exception.— In general.—The amendments made by this part shall not apply to qualified transportation property. 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— 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, is approved by the Federal Transit Administration before January 1, 2006, and includes a description of such property and the value of such property. 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]. Intangibles and indian tribal governments.—The amendments made subsections (b)(2), (b)(3), and (e) of section 847 [amending sections 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.”