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.