Rental Property + 1031 + Parents Retirement + Brother's Stupidity Question

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Spur08
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Joined: Wed Aug 10, 2016 7:20 pm

Rental Property + 1031 + Parents Retirement + Brother's Stupidity Question

Post by Spur08 » Sun Aug 19, 2018 10:43 am

Bear with me while I set the scene.

My folks are planning on moving out of our childhood home and moving a little closer to me, my brother, and their grandkids.



My brother does some real estate transactions through a LLC that he opened/owned pre-marriage. He owns a rental property in Fort Worth that was purchased pre-marriage. He claims that it has been maintained post-marriage by accounts within the LLC that have always been separate. This month, he is selling the rental property for a profit. One question I have is when, if ever, does this account or its assets become community property? No pre-nup in their marriage.

Transition back to the folks. My brother has convinced my parents to let him 1031 exchange the profit from the rental property into buying their home so that he can avoid paying cap gains. After a year, my parents would then buy the property back from my brother as both my parents head into retirement. My brother believes, at that time, he and his wife will be in a better position to open their own vet practice and wants to use that rental property money for doing just that.



Personally, I have a lot of issues with this and I’m trying to educate myself on the disadvantages of this approach. First, my brother’s [second] marriage is not a strong one. He has mentioned to me over the weeks how he thinks he would be better off financially with a divorce. As such, one concern I have is whether or not the home my parents will be living in will be safe/secure if my brother was to go through a divorce at that time. Second, are there any tax disadvantages for my parents or my brother in using this approach? It seems like an extremely convoluted and complex way to avoid paying cap gains for a year and this money is going to end up in a community property destination anyways.

Dottie57
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Re: Rental Property + 1031 + Parents Retirement + Brother's Stupidity Question

Post by Dottie57 » Sun Aug 19, 2018 11:30 am

Spur08 wrote:
Sun Aug 19, 2018 10:43 am
Bear with me while I set the scene.

My folks are planning on moving out of our childhood home and moving a little closer to me, my brother, and their grandkids.



My brother does some real estate transactions through a LLC that he opened/owned pre-marriage. He owns a rental property in Fort Worth that was purchased pre-marriage. He claims that it has been maintained post-marriage by accounts within the LLC that have always been separate. This month, he is selling the rental property for a profit. One question I have is when, if ever, does this account or its assets become community property? No pre-nup in their marriage.

Transition back to the folks. My brother has convinced my parents to let him 1031 exchange the profit from the rental property into buying their home so that he can avoid paying cap gains. After a year, my parents would then buy the property back from my brother as both my parents head into retirement. My brother believes, at that time, he and his wife will be in a better position to open their own vet practice and wants to use that rental property money for doing just that.



Personally, I have a lot of issues with this and I’m trying to educate myself on the disadvantages of this approach. First, my brother’s [second] marriage is not a strong one. He has mentioned to me over the weeks how he thinks he would be better off financially with a divorce. As such, one concern I have is whether or not the home my parents will be living in will be safe/secure if my brother was to go through a divorce at that time. Second, are there any tax disadvantages for my parents or my brother in using this approach? It seems like an extremely convoluted and complex way to avoid paying cap gains for a year and this money is going to end up in a community property destination anyways.
Advise your parents not to do this. It sounds shady to me. And you never know what the price is now versus in a year. Your parents could be adversely affected just by selling price alone. Your brother is letting the tax tail wag the dog.

I am not sure of the divorce consequences.

KyleAAA
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Re: Rental Property + 1031 + Parents Retirement + Brother's Stupidity Question

Post by KyleAAA » Sun Aug 19, 2018 11:53 am

I don’t see the advantage for your brother. So he defers capital gains tax for one year, but he’d need to pay the tax to fund the vet practice, unless he was planning to 1031 exchange into the property the vet practice will run out of. If that’s the case, why not just hold the rental property another year and avoid all the transaction fees? This doesn’t seem to make sense.

Your parents would be out the tax write-off for the year in question and would have to pay round-trip transaction fees (could be quite expensive if a mortgage is involved, less so if hey are both all cash transactions). Is your brother guaranteeing to sell it back to your parents for what he pays him? Ideally he should sell it back for less to compensate your parents for their trouble. Also, this is an intentional effort to avoid paying taxes by self-dealing. It very well may be a legal loophole, but it might also be tax fraud, Either way, a lawyer will need to be paid to advise both parties on the transaction.
Last edited by KyleAAA on Sun Aug 19, 2018 11:57 am, edited 1 time in total.

Spur08
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Joined: Wed Aug 10, 2016 7:20 pm

Re: Rental Property + 1031 + Parents Retirement + Brother's Stupidity Question

Post by Spur08 » Sun Aug 19, 2018 11:56 am

My folks would essentially "pay rent" for that year and then buy the house from him for the balance. I agree it seems shady and, if you knew my brother, you would wonder what game he's playing at. He won't hold on to the rental house b/c he already has it under contract.

In prelim talks with my dad, he said that if things were to go south, it wouldn't be him out of money but rather my brother.


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