If you searched for 12 USC 1341 looking for the Federal Home Loan Bank tax exemption, the citation you want is 12 U.S.C. § 1433. Section 1341 of Title 12 is not the FHLB tax provision; § 1433 is, and it corresponds to Section 13 of the Federal Home Loan Bank Act of 1932.1Office of the Law Revision Counsel. 12 U.S. Code 1433 – Exemption From Taxation; Obligations Acceptable as Credit on Debt of Home Owner The mix-up is common because the Federal Home Loan Bank Act’s original section numbers were renumbered when codified into Title 12, which covers all of banking law.
Section 1433 does two things. It exempts each of the 11 Federal Home Loan Banks from virtually all taxation on their operations, and it exempts the debt securities the system issues from taxation at every level of government. The exceptions to each layer are different, and both matter.
What Section 1433 Exempts at the Bank Level
Each Federal Home Loan Bank is exempt from all taxation imposed by the federal government, any U.S. territory, and any state, county, municipality, or local authority. The statute names the bank’s franchise, capital, reserves, surplus, advances, and income as covered.2Office of the Law Revision Counsel. 12 USC 1433 – Exemption From Taxation; Obligations Acceptable as Credit on Debt of Home Owner In practice that means no federal or state corporate income tax, no franchise tax, no capital stock tax, and no sales or use tax on operations.
The one carve-out is real property. Land and buildings owned by a Federal Home Loan Bank are taxed by state and local governments at ordinary commercial rates.2Office of the Law Revision Counsel. 12 USC 1433 – Exemption From Taxation; Obligations Acceptable as Credit on Debt of Home Owner The city where an FHLB keeps its headquarters still collects property tax on that building. Everything else about the bank’s business is off the tax rolls.
What Section 1433 Exempts for FHLB Debt Securities
The FHLBs raise the money they lend to member institutions by issuing notes, debentures, bonds, and consolidated obligations in the capital markets. Section 1433 exempts all of those instruments, along with the interest they pay, from taxation on both principal and interest at every level of government.2Office of the Law Revision Counsel. 12 USC 1433 – Exemption From Taxation; Obligations Acceptable as Credit on Debt of Home Owner
The exceptions on this layer are different from the real-property carve-out that applies to the banks themselves. FHLB debt securities remain subject to surtaxes, estate taxes, inheritance taxes, and gift taxes.1Office of the Law Revision Counsel. 12 U.S. Code 1433 – Exemption From Taxation; Obligations Acceptable as Credit on Debt of Home Owner For estate planning, that matters. FHLB bonds held at death are included in the taxable estate. The exemption covers ordinary income taxation of the interest, not transfer taxes at death or by gift.
What This Means at Tax Time for Bondholders
If you hold FHLB bonds, the interest is exempt from state and local income tax but fully subject to federal income tax as ordinary income.3FHLBanks Office of Finance. About Bonds4Congress.gov. The Federal Home Loan Bank (FHLB) System and Selected Policy Issues The exemption is written into the statute, so you don’t file anything special to claim it.
The trap is on the state return. FHLB bond interest usually shows up in Box 1 of Form 1099-INT, the standard box for fully taxable interest. Most state tax software treats Box 1 amounts as state-taxable by default. To get the exemption, you generally have to subtract the FHLB interest manually on your state return. Skip that step and you overpay your state, which happens more often than it should.
Why Congress Granted the Exemption
The tax exemption is what lets the FHLB system deliver cheap wholesale funding to its member banks, credit unions, thrifts, insurance companies, and certified CDFIs. Because the banks pay no income tax and their bonds carry a state tax exemption for investors, they borrow at rates only slightly above comparable U.S. Treasuries.5Federal Deposit Insurance Corporation. Affordable Mortgage Lending Guide – Advances Those savings pass through to members in the form of low-cost secured loans called advances, which totaled roughly $677 billion across the system at the end of 2025.6FHLBanks Office of Finance. 2025 Q4 Combined Operating Highlights
In exchange, each Federal Home Loan Bank must set aside 10 percent of its annual net income for the Affordable Housing Program, distributed as grants and subsidized loans through member institutions for projects like down payment assistance, owner-occupied rehabilitation, and rental housing development.7Federal Deposit Insurance Corporation. Affordable Housing Competitive Funding Program The 10 percent set-aside is the statutory tradeoff for the tax immunity: some of the savings the exemption creates has to reach lower-income households directly, rather than flowing entirely to member institutions.