Again, tax avoidance is fine but tax evasion is  obviously something you never want to participate in.  

They can still buy from the related party if they can demonstrate that there is no tax avoidance/evasion going on or if the related party is doing their own 1031 Exchange.  

F all the noise.File 1099-C as “forgiven debt” for all they took  + all the unpaid rent + eviction fees.Let the IRS throw em in jail for tax evasion.

The IRS frowns on tax evasion, in fact people go to prison for it.

I don't beat around the bush or be evasive.

If they are evasive then you likely have a problem tenant on your hands Did you screen them properly?

Where is your HUD-1, 1099's, required disclosures, where is the audit trail of escrow deposits and accounting of you paying off someone's mortgage, ever hear of federal settlement requirements or ALTA, money laundering, tax evasion, ?

(tax evasion, liquor violations in bar business, slumlording, etc.).

I am not a lawyer either...but from what I can tell, buying a property with a fake LLC to sell it at a profit sounds a lot like tax evasion to me.

If you gift the money back to the original person tax evasion is pretty clear.I had someone who wanted me to file a return with a gift of appreciated property, transferred via a QC deed.