"however as the tax laws have changed with respect to reinvesting the gain into a principal residence to defer the gain."

You'd have to be able to make an argument that this was his investment property and not personal property. It never was his principal residence. It wasn't even his second home. It wasn't on the market and available to rent. Even then, "renting" to parents, even if there was money exchanged, would not qualify for investment property, and only investment property offers a deferred gain provision. And you stated he already made the sale, and bought a residence, which would mean that ship already sailed, anyway, and didn't apply, either. None of the personal residence or investment exchange rules apply.

You read it right here: "your basis is the donor's adjusted basis at the time you received the gift"

There is no step up for FMV. That happens with inheritance.