The reason that it needs to be an Sub S corp is that Fannie Mae feels that with an LLC being a pass through type of entity, its virtually the same as you or a sole proprietor.

Here's the plan:Since we each own our own single proprietor LLC (let's call them LLCDave and LLCJoe), we are planning on creating a new LLC (123 Main LLC) for the purchase of this property, in which LLCDave and LLCJoe will each hold a 50% stake.  

The change applied to personal residences (and personal state tax) If your LLC is a single member entity (just you), you file as a sole proprietor (these are called passed-thru entities)

I'm wanting to go from sole proprietor to llc in hopes to protect everything I've worked so hard for.

Umbrella coverage is usually pretty cheap, too.I have yet to hear a completely convincing argument for using an LLC for smaller sole proprietor properties.

Actually our goal is two-fold:1. to get cash to pay upcoming property taxes (OK, poor planning).2. to fund a new entity to rehab propertiesMy husband, a sole proprietor, has owned a few duplexes for years.

I am a sole proprietor owning houses.

If the LLC is a single entity LLC that chooses to be taxed as a sole proprietor then it does not file it's own tax return. 

@Lakshay Groveras a real estate agent you are in business for yourself (either incorporated or sole proprietor) so education costs can be treated as expenses; MLS access is not free you will need to be sponsored by a broker and you will have to pay annual fees to join your local realtor association, local MLS, etc.

A sole proprietor can establish a 401K, hence there is no need for an LLC as far as the IRS is concerned.