Triple Tax-Exempt Income: Investing in Municipal Bonds for a Balanced Portfolio

Triple Tax-Exempt income refers to earnings that are free from Federal tax, the 3.80% Medicare tax, and state income tax, contingent on both state residency and the specific bond issuance.

Why should investors consider municipal bonds as part of their investment strategy? This article explores the benefits of municipal bonds and their role in diversifying a portfolio.

First, here’s a quick breakdown of how “muni” bonds work. Municipal bonds serve as a primary financing method for local governments' vital projects and initiatives. Among these bonds, special tax bonds stand out, secured by specific revenue streams generated through special taxes or assessments.

In the context of towns or cities across the US ("Anytown, USA") the Community Facilities District (CFD) emerges as a unique tax district, funding essential public projects and services within a designated area. Its purpose extends to financing schools, parks, roads, sewer systems, water facilities, and utilities, all under the framework of the Mello-Roos Community Act of 1982.

To realize these improvements, "Special Tax" Municipal Bonds are issued by Anytown, USA, backed by special taxes assessed primarily on developed property and subsequently on approved property. These taxes are proportionally applied to meet the annual special tax requirement within the owners' CFD boundaries, explicitly allocated for servicing the bond's principal and interest.

A significant feature of Anytown, USA's CFD "Special Tax" Municipal Bonds can have a value-to-lien ratio of at least 5 to 1. This ratio signifies the relationship between the assessed value of secured assets (property within the CFD) and the bond's debt issuance. A ratio of 5 to 1 guarantees that the underlying assets are worth five times the debt issued, enhancing bondholders' confidence in repayment.

Distinctively, the collection of the special tax from property owners is seamlessly integrated into homeowners' property tax bills. This simplifies the process, allowing homeowners to make a consolidated payment covering property taxes and the CFD special tax.

This integrated approach offers a layer of security for bondholders. Property tax payments are obligatory, legally binding homeowners to pay. This diminishes the risk of delinquencies and defaults on special tax payments.

In the event of non-payment, Anytown, USA possesses the authority to enforce tax collection using established legal procedures, including placing a tax lien on the property. This lien takes precedence over other claims, further securing bondholders' interests. If the delinquency persists, the local government can resort to foreclosure proceedings to recover unpaid amounts.

In conclusion, Anytown, USA's CFD "Special Tax" Municipal Bonds present attractive features for investors, substantial value-to-lien ratios at a project’s completion of 20x is not uncommon. Because of this, these bonds serve as an appealing option for investors seeking triple tax-exempt income, offering security, in addition to a streamlined collection mechanism that eases tax payments for property owners.

Should you have additional questions on municipal bonds or next steps in acquiring municipals, please feel free to contact Robert Bernard at (888) 486-3939 or 858-217-8141 direct.

Advisory services offered through Financial Sense® Advisors, Inc., a registered investment adviser. Securities offered through Financial Sense® Securities, Inc., Member FINRA/SIPC. DBA Financial Sense® Wealth Management.

Copyright © 2023 Robert Bernard

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