i would agree no section 121 exclusion because there would be no gain recognized by you and your spouse by forming a partnership/llc to which you contribute property, and the third party contributes cash. eventually time will expire to for you to use the 121 exclusion. other issues to you need to consider is who's going to manage the property and deal with the tenants. if it will be the 3rd party, what compensation would they want. a property manager usually is compensated some % of the rents. you need an outside party, probably a lawyer, to review the proposed transaction for any pitfalls. considering you want to get out of having to deal with tenants you have substituted a third party, your partner, for tenants.
