Sell house to LLC on paper

[Jerry Smithson]

So here is my situation. I owe about 54K on one house (appraised at 70K, but could probably only sell for 50K). I bought the house 5 years ago for 24K and rehabbed...but mostly would be expenses and no cap. I have another house about 3 times the size that I owe 0 on (bought for 23.5K and 17K on a new roof...brobably would appraise at 120K or so) that I am rehabbing to live in. My marginal income tax bracket right now is only 25%. I want to rent out the house, but if I leave it in my name I will only be able to depreciate about $800 a year after deducting land. If I set up an LLC, finance the bigger house to pay off the smaller house, could I transfer the smaller house to the LLC to increase the depreciation without a siginificant cash outflow, while protecting myself in not having to pay back a capital gains tax as part of the 5/2 rule? What would be considered my taxable basis for depreciation if no actual money changes hands? I did not keep very good records when rehabbing the house, but the major cap expenses were less than 2K anyway.

[Jerry Smithson]

Paul, that is pretty much my question. Can I cash out equity today by transferring to the LLC, and depreciate this new value? I really don't think that I can, due to it not being an arms length transaction, but I thought that I would like some confirmation on this.