Table of Contents

The Basics of Private-Purpose Bonds
Investing in Private-Purpose Bonds
The Broader Impact
What Is a Municipal Bond?
Why Invest in Municipal Bonds?
What Is a Private Activity Bond🍨? How Does It Differ From Private-Purpose Municipal Bonds?
The Bottom Line

Private-Purpose Bond: What It Is, How It Works, Impact

By

澳洲幸运5官方开奖结果体彩网:Carol M. Kopp

Updated December 12, 2023

Reviewed by

Gordon Scott

Fact checked by

Timothy Li

A private-purpose bond is a municipal bond that is issued to finance a project that benefits a nongovernmental entity. By definition, if 10% or more of the benefit of the money raised benefits a private entity, it is a private-purpose bond.

Key Takeaways

A private-purpose bond is a municipal bond that deploys most of its funding to benefit private, nonpublic activities or private parties.
If more than 10% of its proceeds are earmarked for private, nongovernmental activities, it is considered a private-purpose bond.
While public-purpose municipal bonds are tax-free, private-purpose bonds are not, making the private bonds less appealing to investors than other munis.

The Basics of Private-Purpose Bonds

Generally, municipal bonds are issued to finance projects that benefit a town or city's residents. It might fund road improvements or finance a center for older ad♛ults.

In some cases, the pཧroject may also benefit a private entity. For example, a city might construct a new football stadium. The city might expect to benefit economically from the presence of the new stadium, as do the owners of the football franchiseꦇ. That would make it a private-purpose bond.

The interest payments that investors receive from private-purpose bonds are taxable unless the bonds are specifically exempted.

Important

Private-purpose bonds generally do not offer the same tax benefits as other municipal bonds. For this reason, they are sometimes known as private activity bonds.

Investing in Private-Purpose Bonds

A major incentive for investing in municipal bonds is its tax benefits. They are exempt from federal and, usually, state and local taxes if the investor is a resident of the state or municipality that issued the bond unless they are private-purpose bonds.

If you're considering buying municipal bonds, first check the offering statement. By law, it must contain an opinion by a qualified tax attorney on whether the bonds are public purpose or private purpose as defined by the Tax Reform Act of 1986.

In addition, private-purpose bonds are sometimes referred♕ to as taxable municipal bonds. That 🔯makes the difference quite plain without needing to resort to the fine print in the offering.

The Broader Impact

Before the 澳洲幸运5官方开奖结果体彩网:Tax Reform Act of 1986, municipal bonds intended to spur private economic investment were more common. A financially struggling city, for example, might issue a bond to help underwrite the construction costs of new industrial development, in hopes of bringing new jobs to town.

The loss of some or all the tax advantages of some kinds of municipal bonds made t🦩hem less attractive to investors.🌺

What Is a Municipal Bond?

Municipal bonds are debt securities issued by a state, city, town, or county to fund public projects like highways﷽, schools, or hospitals. These bonds are generally exempt from federal taxeওs and, for local residents, state and local taxes.

Why Invest in Municipal Bonds?

Investors often choose municipal bonds for their lower risk profile and tax advantages, as the interest income from these bonds is often exempt from federal and, frequently, state and local taxes. This 𒀰is an attractive option for conservative investors seeking stable returns.

What Is a Private Activity Bond? How Does It Differ From Private-Purpose Municipal Bonds?

A 澳洲幸运5官方开奖结果体彩网:private activity bond is a municipal bond issued by local or state governments on behalf of a private sector entity. The proceeds from these bonds are used for projects that primarily benefit the private sector. The key difference between private activity bonds and private-purpose municipal bonds lies in their tax-exempt status and the extent of private involvement. While private-purpose municipal bonds can have some private benefits, private activity bonds are explicitly for projects with significant private sector involvement, which influences their tax-exempt status under federal law. The federal government, since 2💛005, has allowed up to $15 billion each year (at the discretion of the U.S. secretary of transportation), doubled to $30 billion as of 2021, in private activity bonds for federal highway construction to be tax deductible.

The Bottom Line

Private-purpose bonds are for projects that mainly benefit private entities. Once more than 10% of a municipal bond's benefits go to a nongovernmental concern, it offers fewer tax benefits than other municipal bonds. Private-purpose bonds finance assorted projects, from industrial development to community facilities, and are behind major projects requiring public and private funding.

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