Housing Bonds

Debt securities issued by state or local governments to raise money for affordable housing development. Housing bonds sometimes require voter approval and are repaid out of the government's general tax fund or from an increase in the sales tax rate, income tax rate or property tax rate.

In addition to repaying the bond principal, the state or locality must pay interest on the money it borrows. Housing bonds typically have a low interest rate. For investors, the interest paid by housing bonds is exempt from federal and sometimes state income tax because housing bonds are a type of municipal bond. This tax exemption helps to compensate for the bonds' low interest rate.

Federal low-income housing tax credits are another source of capital that may be used instead of or in addition to housing bonds in order to finance affordable housing projects. Housing bonds are beneficial to the state as well as to private investors. On the one hand, the government gains access to a large amount of cheap financing. On the other, the tax advantages offered by housing bonds are highly attractive to those in the upper tax brackets.