The property itself can be separated and held in either a LLC or trust to protect the asset from lawsuit and to identify ownership. 

The other room is an in-law suite.  

That's part of it, however, the problem is that these government offices are protecting themselves from lawsuits.

The exemption protects the homeowner from losing his home from lawsuits depending on the state.

I have a class action lawsuit against Scranton for its illegal rental registration fees and its illegal garbage fees so don't pay any of them.As they say, "Buy low, Sell high."

Why not file a lawsuit against the tenants? 

AIRBNB/Homeaway and some of these organizations should be filing lawsuits at this point.

By sending the money to you, you are commingling asset and in case of lawsuit the opposite attorney will tell the judge that your LLC is a sham and an alter ego as you receive the money directly.

If you fail to follow the rules, you may open your personal assets to a lawsuit.

We like to say good insurance is the second of the "five pillars" of protecting your assets, so while it's very important and helpful, even a good umbrella policy is only part of the picture for "complete" protection.The first pillar is avoiding unnecessary and risky activities (don't drink and drive, insurance generally won’t cover your poor decisions) and take good care of your investments(maintain your property, etc) - these simple steps will help you prevent lawsuits before they even occur.