Private Purpose Bonds vs Public Purpose Bonds – Types of Municipal Bond
A private purpose bond is one of the two types of municipal bond separated by The Tax Reform Act of 1986. The other type of municipal bond is a public purpose bond which differs quite considerably to the former.
The key feature of a private purpose bond is that they are solely used to help finance private investments and amenities. Comparatively, a public purpose bond is exclusively for investments that benefit the public, i.e. public facilities or projects that benefit a sizeable community.
The reason why The Tax Reform of 1986 led to the separation of municipal bonds into two types was for a change in the taxation regulations. The taxation regulations are currently quite clear and state that: Private Purpose Bonds are applicable for taxation unless exempted (which is rare). Public Purpose Bonds are exempt from federal taxation.