.• Category 3: Net gain (to the extent taken into account in computing regular taxable income) attributable to the disposition of nonbusiness property and property other than property held in a trade or business to which the 3.8% NIIT does not apply.

Investing in a State with no tax when you live in a taxable state is not going to save you taxes becuase the taxpayer will always have to pay taxes in the state they live in.

You say it's basis and not taxable. 

The last pro to an LLC is that if you are a business generating income on it, let's say $10,000 a month, well now it's a K1 taxable income not a personal income which will save you some of taxes at that point if you generate the income on them. 

Your rental income and pay-down on the principle are taxable.

"Homeowners' ExemptionThe California Constitution provides a $7,000 reduction in the taxable value for a qualifying owner-occupied home.

But there is no statutory holding period  only your intent and how you can demonstrate it.Converting from investment to primary doesn’t create a taxable event.as long as you own the property you’ll never pay the tax!  

We will be getting specific legal/tax advise from our own counsel, but for now this is a 30,000 foot view to see if we at least agree in concept to a structure before really diving in.Buying out the partner is not a taxable transaction for the buyers but the tax implication for the seller can be different based on if the third partner is redeemed or he/she sells the interests.

Would CA consider this a taxable event?

Any depreciation and gains are taxable on sale.