2.The best way to obtain the necessary permits and ensure compliance moving forward?

Rent payments from the medical LLC are fully deductible as a business expense, while the property-owning LLC will report the rent as taxable income, which can be offset by deductions for expenses like mortgage interest, property taxes, maintenance, and depreciation.To ensure compliance, document how FMV was determined—using market comparisons, an appraisal, or similar data—and draft a formal lease agreement outlining the terms, rent amount, and responsibilities.

There are online platforms like Rentable.com that will handle opening the correct accounts / all compliance tasks related to managing deposits 

While their services may seem expensive, they can save you money by maximizing deductions and ensuring compliance with tax laws.

@Gregory Wilson  - partnership return compliance has become insane in the last several years.

The Yale Law Journal article, "Zoned Out: How Zoning Law Undermines Family Law’s Functional Turn," highlights this issue, noting that while family law has evolved to recognize diverse family structures, zoning laws have lagged behind, potentially hindering innovative housing solutions like co-living.Challenges for Co-Living InvestorsFor real estate investors interested in co-living, these restrictive definitions can lead to:Legal Barriers: Difficulty obtaining permits or approvals for co-living spaces due to non-compliance with traditional family definitions in zoning codes.Operational Challenges: Potential fines or legal disputes arising from housing arrangements that don't conform to local zoning definitions of a household.Market Limitations: Reduced ability to meet the growing demand for affordable, shared housing solutions.Advocacy for ReformThe Bloomberg article, "Why Are Zoning Laws Defining What Constitutes a Family?"

I am an seasoned real estate agent and affordable housing compliance manager in NYC with some experience in the Hudson Valley Area.

The upgrade basically put a target on my back with the fire marshall as he came by to inspect the work and found that there were a few compliance issues.

Remember your situation is unique so it's important to consult with a tax advisor or CPA to explore all available options and ensure compliance with tax regulations.Thanks!

Falling out of compliance can lead to penalties, lawsuits, and even damage to your reputation as a landlord.