This incident triggered every trouble I'm experiencing now. 1) The officer from LAHD is after me saying that I need to register the property as a rental property and evict her with relocation assistance, which cost about $9000. 2) The Building department is after me with the order to comply: which I believe it might be better of demolishing the house and rebuild it. 

This is where I see so many people get caught up and are never able to actually pull the trigger on an investment property.  

I'm trying to help you be comfortable with what you buy BEFORE you pull the trigger.

I know his cost basis in the property is likely very very low, so selling would trigger significant capital gains and depreciation recapture. 

Noooo you triggered the keyword alerts.

We've always been interested in investment properties and have been following BiggerPockets for many years now but never pulled the trigger.

I commend you for pulling the trigger based on having just enough experience, and not over analyzing. 

You will need to clearly set forth the circumstances that allow or trigger the transition of a new trustee.

That conversion will not trigger any tax.Unfortunately we can no longer eliminate all of the tax simply by converting to a new primary and living there. 

Operating through an LLC can certainly provide some protection, but many mortgage companies include a "due on sale" clause in their contracts, which means transferring the property could technically trigger the need to pay off the mortgage.