A private activity bond is a security that has been issued by a local government, and for which the proceeds are to be used by a non-government entity for a qualified project. A qualified project must be expected to generate some benefit for the public. Proceeds from the project are used to pay back the bond. Examples of qualified projects are:
- Hazardous waste facilities
- Low-income housing
- Mass commuting facilities
- Property acquisitions in blighted areas
- Solid waste disposal facilities
The key benefit of a private activity bond is that the bonds are tax-exempt, making them more attractive to high-income investors. However, the issuing government does not guarantee repayment of these bonds. Also, the interest on private activity bonds may be included in the calculation of a taxpayer's alternative minimum tax, since it is considered a tax preference item.