4.25 Taxable State and City Interest

Interest on certain state and city obligations is taxable. These taxable obligations include federally guaranteed obligations, mortgage subsidy bonds, private activity bonds, and arbitrage bonds.

Federally guaranteed obligations.

Interest on state and local obligations issued after April 14, 1983, is generally taxable if the obligation is federally guaranteed, but there are exceptions allowing tax exemptions for obligations guaranteed by the Federal Housing Administration, Department of Veterans Affairs, Bonneville Power Authority, Federal Home Loan Mortgage Corporation, Federal National Mortgage Association, Government National Mortgage Corporation, Resolution Funding Corporation, and Student Loan Marketing Association.

Mortgage revenue bonds.

Interest on bonds issued by a state or local government after April 24, 1979, may not be tax exempt if funds raised by the bonds are used to finance home mortgages. There are exceptions for certain qualified mortgage bonds and veterans’ bonds. Check on the tax-exempt status of mortgage bonds with the issuing authority.

Private activity bonds.

Generally, a private activity bond is any bond where more than 10% of the issue’s proceeds are used by a private business whose property secures the issue, or if at least 5% of the proceeds (or $5 million if less) are used for loans to parties other than governmental units. Interest on such bonds is generally taxable, but there are exceptions (4.24). Check on the tax status of the bonds with the issuing authority.