Private-Purpose Bond

What Is a Private-Purpose Bond?

A private-purpose bond is a municipal bond that is issued to finance a project that benefits a non-legislative entity. By definition, in the event that 10% or a greater amount of the benefit of the money raised benefits a private entity, it is a private-purpose bond.

Private-purpose bonds generally don't offer a similar tax benefits of other municipal bonds. Thusly, they are here and there known as private activity bonds.

The Basics of Private-Purpose Bonds

Generally, municipal bonds are issued to finance projects that benefit its residents. It could fund road improvements or finance a senior residents center.

At times, the project may likewise benefit a private entity. For instance, a city could build another football arena. The city hopes to benefit economically from the presence of the new arena, as do the owners of the football franchise. That might make it a private-purpose bond.

The interest payments that investors receive from private-purpose bonds are taxable except if the bonds are explicitly exempted.

Investing in Private-Purpose Bonds

The tax benefit is one of the greatest incentives to invest in municipal bonds. They are exempt from federal taxes, and typically from state and nearby taxes too, in the event that the investor is a resident of the state or municipality that issued the bond — that is, except if they are private-purpose bonds.

An investor considering buying municipal bonds ought to check the offering statement. By law, it must contain an assessment by a qualified tax attorney on whether the bonds are public-purpose or private-purpose as defined by the Tax Reform Act of 1986.

Moreover, private-purpose bonds are now and again alluded to as taxable municipal bonds. That, of course, has the effect very plain without depending on the fine print in the offering.

The Broader Impact

Before the Tax Reform Act of 1986, municipal bonds expected to prod private economic investment were more normal. A depressed city, for instance, could issue a bond to assist with guaranteeing the construction costs of new industrial development, in order to carry a number of new positions to town.

The loss of some or all of the tax benefits of a municipal bond made them less attractive to investors.

Features

• A private-purpose bond is a municipal bond that utilizes the vast majority of its funding to benefit private, non-public activities or private gatherings.
• While public-purpose municipal bonds are tax-free, private-purpose bonds are not, making the private bonds less interesting to investors than other munis.
• In the event that over 10% of its proceeds are reserved for private, non-legislative activities, it is viewed as a private-purpose bond.