Do we 1st do tax on the LLC and whatever we split 50 & 50 then each claims on their taxes ?

(Loan paydown, tax savings, etc etc..).

In doing so, bear in mind that the cost and admin of a corporation is higher and that the tax treatment is different:1.

According to our understanding:1) California does not recognize REP status, but we could claim it on our federal taxes, is this correct ?

@Jeanette LandI always recommend using a tax professional.

@Bradley Buxton makes a very good point to make sure to do your due diligence as you won't be an owner occupant like your in-laws.Last bit of advice: Because this is a friendly deal, you want to take your time to make sure you structure it in a way that maximizes tax and cashflow benefits for both parties. 

I learned this when I bought 12 new builds for GOZONE tax bene's really nice brick homes in best part of town but values just did not rise enough so by the time i had to change everything out and pay sales commish it was break even at best..

Agreed - plus two additional thoughts:1) I always recommend having your CPA also review the drafted operating agreement for the tax issues. 

Note that the diagram doesn't consider tax implications—that's another important factor you'll need to include in your decision.

As I'm new to this domain, I would to hire a consultant to perform some zoning and other due diligence activities.