What Is a Special Assessment Bond?

Special assessment bonds are 澳洲幸运5官方开奖结果体彩网:general obligation bonds, commonly issued to fund development projects, where the interest owed is paid by taxes levied solely on the benefic🥂iaries of that project.

Understanding Special Assessment Bonds

A 澳洲幸运5官方开奖结果体彩网:municipal bond is issued by a state or local ﷽government to raise capital to fund projects such as highways, sewage systems, recreational parks, public schools and so on. When a municipal bond is issued to sponsor the improvement of properties in a specific area of a city, town, or county, the bond is referred to as a special assessment bond.

澳洲幸运5官方开奖结果体彩网:Investors who purchase a special assessment bond receive periodic interest from the issuer until the bond matures, at which time the 澳洲幸运5官方开奖结果体彩网:principal will be repaid to 澳洲幸运5官方开奖结果体彩网:bondholders. The payment obligations on the bond are guaranteed from revenue that is received from the portion of taxes levied on residents who benefit di𝓰rectly from the project. In other words, additional tax is imposed only on those who will benefit directly from the improvement to def꧅ray the payments on the bond issue. Special assessment taxes cannot exceed the total cost of the project.

Example of Special Assessment Bond

For example, if a special assessment bond was issued to pay for sidewalks to be repaved in a certain community, an additional tax would be levied on homeowners in the area benefiting from this project. Area homeowners get nicer walking paths, and will probably see the value of their property increase accordingly, but this comes at a price. Their 澳洲幸运5官方开奖结果体彩网:property taxes will increase to pay the interest owed to the bondhol🐬ders by the municipality.

Since the interest on special assessment bonds is paid by taxes of the commౠunity that benefit from the development, it is not unusual for the members of the benefiting community to invest in the issue, t🐭hereby offsetting the additional taxes that are levied in order to finance the bond.

Special Considerations

The interest on a special assessment bond may be 澳洲幸运5官方开奖结果体彩网:fixed or variable. The length of maturity will vary depending on how complex the project is, with the typical maturity range falling from one to 20 years. Furthermore, these bonds may or may not be backed by the 澳洲幸运5官方开奖结果体彩网:full faith and credit of the municipal government. If it is not secured by a full faith and credit pledge, it is more risky than a 澳洲幸运5官方开奖结果体彩网:general obligation bond of the same issuer.

Like most municipal bonds, the interest on special assessment bonds is exempt from federal taxes, and most state and local taxes if the investor lives in the state or municipality issuing the debt. The higher an investor’s 澳洲幸运5官方开奖结果体彩网:marginal tax rate, the more valuable the bond’s tax exemption is and, thus, more desirable. Therefore, there is usually a stronger demand for special assessment bonds in states with high tax rates. If a state or the federal government reduces tax rates, the bonds lose some of their advantage for high-澳洲幸运5官方开奖结果体彩网:tax-bracket individuals and, thus, become less desirable.

The Bottom Line

Special assessment bonds are general obligation bonds, commonly issued to fund development projects, where the i💃nterest owed is paid by taxes levied solely on the beneficiaries of that project. Interest on special assessment bonds is exempt from federal taxes, and most state and local taxes.