Specifically, we'd like to understand:Liability Protection: How does each state's legal framework and case law compare in protecting our personal assets from liabilities related to the property?

Current building code requirements and local amendments should be considered forrebuilding the fire-damaged portion of the residence.The Engineer shall have no liability to the Owners, or to others for the acts or omissions of theContractor or any other Persons performing work on the project, or failure of the Contractor tocarry out the work in accordance with this letter, except where specifically inspected andapproved by the engineer and discovery of defect is possible within the normal ability or standardof care for the industry.This report is based on a diligent visual inspection of the referenced areas.

From a liability position the previous owners get walk a way from a nuissance property and an uninsured property that could be inhabited by squatters. 

You will want to cover a lot of things in the lease to push any liability away from you and onto the Sober Living company. 

I have been considering joining AAGLA and know they have lease forms and other forms, but it is $199/yr.In the next couple months, I am looking to get a standard CA NAA lease written up with RUBS for water and sewer billing and a requirement for the tenants to carry their own renters insurance policies with $100K or so (if there are recommendations around this please let me know) liability limits.Does the community here have any advice on how best to do this and where I could get a lease form that does the trick?

Remediate--you will have liability if you do not on the rent or resell. 

I would caution against a playroom as just like a pool or outdoor playground that brings a higher risk liability with it. 

This comes with some other ramifications around legal liability and the ability to get a mortgage on the property.The other way to fix this is to create an LLC now, and both you and your MIL contribute the current properties into the LLC, then the LLC 1031 exchanges the old properties into the new property.

House goes into LLC, but if you still have leases outstanding signed by you personally, that can open the door to maintain personal liability.  

Each series llc can have its own members, assets, liabilities, contractual agreements, etc.