Transfer Home Tax Basis from Parent to Child - California Prop 58

[Mark G.]

Does anyone have experience with parent to child real estate transfers in CA? I understand there is a mechanism that allows a child to buy a home from their parents and retain the original real estate tax basis under California Prop 58. 

The house was originally a primary residence but was converted to a rental property when they moved a number of years ago. Current tax basis is approximately 25%-35% of FMV and the sale would trigger a sizable capital gain. Child would like to buy the house, potentially for below market value, retain the original real estate tax basis and then parents would like to use the proceeds from sale to complete a 1031 in order to defer capital gains.

I can see a few potential issues:

1. Does the fact that parents converted it to a rental from primary residence cause a problem
2. Is a purchase below FMV possible or are there 1031 ramifications
3. If below FMV a bad idea, could some sort of non-interest bearing note be structured between the parties to make up gap between proceeds and FMV
4. Can 1031 exchange property they identify be contributed into an LLC after closing for asset protection

Any advice on the structure outlined above, or other ways to transfer real estate from parent to child (while parents still living) would be greatly appreciated. Would also welcome a referral to an attorney/CPA to assist with executing this transaction if it is possible.