Substance over form. 

We look to the economic substance of the transaction, and in the case of rental properties, the income/loss will be passive in nature.UNLESS: the shareholder of the entity qualifies as a real estate professional for tax purposes.

However, that technique raises several red flags in my mind:If the LLC exists solely to hold the primary residence, and has no real business purpose, I'm concerned that the IRS would rule that it's a "sham", and any tax deductions would be disallowed.Most likely due to violating the Economic Substance and Substance Over Form doctrines.If the LLC has some additional (real) business purpose (e.g. additional rental properties, or a commercial venture...such as selling office supplies), then the personal residence is in jeopardy in the case of a lawsuit brought against the LLC resulting from any investment or business property held within the LLC (e.g. slip and fall at a rental property).Even in that case, I'm assuming the residence would still be classified as personal property (even if held within the "business" LLC), so that any expenses paid (maintenance, repairs, etc) would not be deductible.Not to mention that mixing personal and business assets within the LLC creates additional risk for "piercing the veil" (alter ego) for any potential judgments.If they decided to proceed and ignore the above issues associated with using an LLC, there are additional issues:It's more difficult to get financing for personal property held in an LLC, and any financing would be at a higher interest rate.It's more difficult to get hazard insurance.They would need to pay the LLC (themselves) fair market rent, as tenants of the residence.They (as LLC members) would need to pay income & FICA taxes on the income (rent) received from themselves as tenants (resulting in double taxation of that money).They might lose their capital gains exclusion:If they keep it as a Single Member LLC (since they're husband & wife in a community property state), they could probably keep the capital gains exclusion, since the IRS typically considers that a "disregarded entity" (as long as the LLC has not elected to be treated as a corporation for tax purposes).

These kinds of the transaction go against Economic Substance Doctrine.A transaction has economic substance if: (1) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer’s economic position; and (2) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into such transaction.There is no change in your economic position by transferring your primary residence into a LLC, You do not have a substantial purpose for entering into such transaction other than to simply avoid paying federal income taxes.Hope that helps. 

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He is all hype and no substance!

The most common ways to pierce the corporate veil are (1) being under capitalized and under insured; and (2) law of form and substance (file minutes, hold board meetings, etc.). 

The issues I'm seeing are small, such as what looks like Avocado smeared on a light switch and a sticky substance that was hard to clean in a kitchen cabinet.

But there are other factors that would come into play like statute of limitations depending on how long the installment agreement lasted for and then there's substance over form issue that we would just correct in the final year of payment.

There are some good folks in this crowd too, but a large mix if new people and people more interested in hype than substance in my experience.