You may get varying opinions on this proposed transaction, but here's mine:
Essentially, you have not actually sold the house to an unrelated third party so Section 121 does not apply. Per the suggestion you posted, what you have done (or would have done) is sell an interest in an LLC to a third party. Thereafter, you, your wife, and the third party would then own shares in the LLC as members with the primary asset being a house.
Note that an interest in an LLC is never considered to be real property but, rather, personal property (personalty versus realty). Basically, you would all be partners in the LLC, since an LLC defaults to partnership status, with the primary asset of the LLC being a house.
If you get a different opinion from anyone (on this board or elsewhere), I would love to hear the rationale for how this proposed transaction would qualify for the Section 121 exclusion.
