Dowsides to this lease option strategy

[Greg B.]

I have an interesting purchase strategy being presented to me, and I wanted to put it in front of the community here to help me poke holes in it. 

The situation:  I have a family member who wants to help me out in growing my portfolio.  When we first started talking, he was going to do a straight private financing loan to me for the purchase of a property.  After some discussions, we started coming up with a strategy to help him whittle down some carried forward capital losses.

So, instead of lending me the money to buy a property at 6% interest, (which he would have to pay income tax on) he would buy the property himself and lease it back to me.  I would pay him a flat annual leasing fee equivalent to 2% of the purchase price.  I would also purchase the property from him in 3 years at a 4% appreciation rate.  The 2% lease and 4% appreciation is equivalent to the 6% interest I would have paid, but he would be able to apply the 4% to his carried forward capital losses, because they would be considered capital gains when I buy the property.  I would then sub-lease the property to tenants and manage the property, retaining the rents minus expenses.

Advantages to me:  

• greater cash flow now, as I would be free to rent out the property and keep all revenues (minus expenses and the 2% lease fee)
• I can use the purchase in 3 years as the replacement property in a 1031 of another property, alleviating some of the concerns around finding replacements.

Advantages to him:  

• less tax, and therefore better returns.

Here are the downsides that I can identify, and I'm looking for input on others:

• I have to pay tax on the net income, as I would have no offsetting appreciation.  So, the tax he saves comes from my pocket.
• If the market turns, I would be underwater when I purchase in 3 years because I'm locking in 4% appreciation.
• Capital expenditures are a grey area.  If I have to put in a new furnace, do I own the furnace at a house he owns?  Can I depreciate that?
• The big one:  would the IRS consider this tax evasion?  I have no interest in doing anything below board, and this has me concerned.

Thank you all for any help you can give in brainstorming disadvantages.