Sale of Property to LLC (Partnership) to step up basis

[Aaron Heun]

Ive done some research and spoke to an accountant but Im curious if anyone here has advice on this topic. We (my wife and I) converted a primary residence to a rental property and it has appreciated considerably. We also have a very low fixed rate mortgage from 2012. We are currently depreciating off of our adjusted basis but would like to be able to step up our basis to FMV before our 2 in 5 years rule expires. We want to do this both for depreciation purposes and to reduce future capital gains if we were to sell. Our accountant says that we can sell the property to a newly formed LLC to do so, based on letter ruling 8350084 (which is discussed and debated in a number of BP posts). However the upside of the depreciation appears to be offset by the current interest rates available if we were to refinance in the name of the LLC. Our mortgagee seems open to transferring the mortgage to the LLC as long as we personally guarantee it. But we can't just transfer the property to a partnership as that would pass on its current tax basis. We have to "sell" the property. So the question is... is there a way to sell the property to the LLC with the mortgage that would constitute a sale to the LLC as opposed to a contribution of property to the LLC.

There are a number of tax articles about how to have "tax-free" transactions with your own partnership, but I cant find any that address the opposite.  We want to incur the gain as it would be tax free under section 121.  Is the difference in the type of deed recorded?  Anyone have experience with this?