The Why & How Behind The Nest Fund
We are focused on residential real estate in the single family and multi-family asset classes. The real estate is located in Midwest cities with favorable demographics that include stable and diverse employment, population growth and other criteria including favorable pricing and rent, with a rule of thumb of getting our “all-in costs” for given properties at around or less than 110 times our monthly rent revenue. In addition, the quality of our operator and the assistance of any local governments will affect our investment decisions.
TAX BENEFITS AND DEADLINES THAT IMPACT YOU
Normally, a profit resulting from the sale of an asset is taxed at a maximum capital gains rate of 20%. Many states have chosen to mirror the Federal level of OZ tax treatment as well.
DEFER THE ORIGINAL CAPITAL GAIN TAX
Under the OZ legislation, Congress gives taxpayers the option of deferring payment of that tax until year-end 2026 by reinvesting that profit into an Opportunity Zone Fund (“Fund”). The Fund then reinvests the proceeds into eligible Opportunity Zone property (“OZ Property”).
REDUCE THE ORIGINAL CAPITAL GAIN TAX
If invested for five years, investors will have their original capital gains tax liability reduced by 10%.
If invested for seven years, the investor receives another 5% tax break on the original amount deferred, for a total 15% tax-break. The amount of tax deferred becomes due and payable by year-end 2026,
so investors must invest by year-end 2019 to achieve the full 15% reduction provided by the seven-year investment timeline. The 10% reduction phases out two years later (year-end 2021), and temporary deferral of the original tax liability is gone by year-end 2026.
ELIMINATE CAPITAL GAIN TAX ON FUND
If the OZ Fund investment is held for at least ten years, then the Fund’s sale of its OZ Property will be treated by the IRS as 100% tax-free. All OZs are scheduled to expire by year-end 2028, but investments made prior to this expiration date will continue to accrue tax-free gains until 2047.
A TEN-YEAR TIMELINE
Invest capital gains from prior investment into The Nest Opportunity Fund®, a Qualified Opportunity Fund, and begin deferring tax
Reduce future tax liability as the tax basis increases from 0% to 10% of invested capital gains
Further decrease future tax liability as the tax basis increases by an additional 5%, totaling a 15% increase
Pay taxes on original capital gain (less 15% reduction)
Pay no federal capital gains taxes on the appreciation of your Nest Opportunity Fund® investment once sold
ASSET CLASS SELECTION
As Opportunity Funds require “significant improvement” of the underlying properties, which is inherently more risky than buying already performing assets, we have chosen to reduce risk by choosing an asset class that is historically less volatile and can get to market faster. While both single family and multifamily have historically been less sensitive to economic cycles than other real estate asset classes, we will initially focus on single family.
In the heavy rehabilitation of single family housing, most markets typically have smaller “mom and pop” operators with only a few units being rehabilitated at a time. This makes it difficult for them to set up the systems required to operate at scale.