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1031 exchange and LLC

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mboss310
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1031 exchange and LLC  Reply with quote  

Hi, I'm a total newb and really could use some advice.

My wife and I invested in an LLC that bought an income property, and now two years later the LLC is going into a 1031 exchange, selling the old property and buying a new one. We have made some profit, and my wife and I need our share to put a down payment on a house. We only own a 6% stake in the LLC, but the manager of the LLC is refusing to let us out, saying the LLC has not been dissolved because of the exchange, even though the operating agreement says it dissolves once the property is sold.

I really just want my money back to buy a house and I'm pretty sure this is my legal right to do so. Am I wrong?

Any advice much appreciated! Thanks! -Mark
Post Tue May 21, 2013 12:17 am
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oldguy
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A 1031 exchange means that you trade one property for another, the sale/buy process is controlled by an intermediary and has to be done within a time limit. The transaction is not a taxable event, the tax liability of the old house is moved into the new house - ie, when the ownership is eventually closed then the tax will be due on the final sale of the fianal house.

Normally this is done by individual owners - so when they sell, or when their estate is closed, the tax is due. I don't know how it works when you enter into a 'club' of investers, is there a contract that specifies your rights, cancellations, etc?

Thankfully you only bought 6% - you may have signed up for a very long time, sorry.
Post Tue May 21, 2013 1:27 am
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mboss310
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Thanks for your Response Old guy!

The LLC has a operating agreement that clearly states the company will dissolve when the property is sold, but the llc manager is suggesting that the exchange is technically not a "sale," since the money has gone into a 1031 account. I think that is wrong, so I'm trying to figure out what the truth is. They have offered to buy us out, but at a fair market price that is significantly lower than the value of our stake. Ugh!
Post Tue May 21, 2013 1:54 am
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coaster
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quote:
Originally posted by mboss310
but at a fair market price that is significantly lower than the value of our stake.

The current value of your stake IS the fair market price, which may or may not be more or less than what you originally invested, depending on whether the market went up or down.

That's what people don't understand about investments in variable-value assets, whose value is determined by the market. What they originally paid is NOT what the value is; the value is what someone else is willing to pay you to take it off your hands. That's what makes a market price. If the buyer and the seller agree on the price and the transaction takes place, then that's what the "fair market value" of the asset is. Someone else who owns the same asset can place a value on his ownership value; which may be more or less than what he paid for it.

~Tim~
Post Tue May 21, 2013 4:50 am
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mboss310
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Thanks Tim, but I'm not looking to sell my stake, whether at "fair market" value or not. I am saying that I think the LLC has technically been dissolved by the sale of the original property, so I am entitled to withdraw my money from the partnership. I do not wish to invest in the new property and do not want to be part of the 1031 exchange, but the manager is saying I don't have that option. Does that sound correct to you?

The "fair market" argument is not really the issue here.
Post Tue May 21, 2013 5:03 am
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oldguy
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quote:
I am saying that I think the LLC has technically been dissolved by the sale of the original property, so I am entitled to withdraw my money from the partnership.


No, the manager is correct, a '1031 exchange' (aka Strarker exchange) is just that, an exchange - nothing has been dissolved or recapitalized. You don't have the option to not participate in the 1031, it is a regulated trade at the LLC level. Presumably you could have voted against the trade prior to the decision - but you cannot split out your part of the trade after the event.
Post Tue May 21, 2013 2:41 pm
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coaster
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Re: 1031 exchange and LLC  Reply with quote  

quote:
Originally posted by mboss310
I really just want my money back to buy a house and I'm pretty sure this is my legal right to do so. Am I wrong?

OK, Mark, I understand this is your point; I was just making my own point bouncing off one of your comments (for the benefit of other readers). Your legal rights are defined by the laws that govern LLC's, the laws that govern 1031 exchanges, and the documents that constitute the LLC entity. When you invested in the entity, you bound yourself to all of those, legally speaking. Without doing my own research, I'm pretty sure oldguy is correct; he usually is concerning these sorts of things; but I suggest you at least get the incorporation documents and read all the mice type yourself to see if there's some out there for you.

~Tim~
Post Tue May 21, 2013 3:09 pm
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mboss310
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Thanks oldguy and Tim, I see your point and I'm guessing you are right. I've done some research of my own and it seems the exchange is not a sale, like oldguy has said. Not the end of the world... But thanks for your time and advice!
Post Wed May 22, 2013 3:54 am
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