Legal Question in Real Estate Law in California

You're going to run into trouble with your lender if you try to transfer the property into an LLC. Pretty much every lender is going to require you to take out an investment real estate loan at that point, and even if you can get a residential loan, you will have to take out a new loan in the name of the LLC (almost certainly with your personal guarantee). Then, in order to preserve the liability protection of the LLC, yes, you absolutely will have to treat it as a separate business that owns a rental property. All income, expenses and payments must be made by the LLC with a separate tax ID, separate bank accounts, etc. As for taxes, you can probably and will probably want to set the LLC up as a "disregarded entity" for tax purposes. The income/expense profit/loss will still have to be separately accounted for and reported, but then the net income will not be taxed at the LLC level, but rather passed through as a source of individual income to you as if you were just a sole proprietor without the LLC. If you continue to live in the property once it is in the LLC, though, you are creating tricky tax issues because the iRS may treat the rental value of you living there as income. So you may find you have complicated bookkeeping where you have to pay rent into the LLC. Bottom line: your plan is not for amateurs. You will need a personal lawyer to help set things up and a good tax accountant to make sure you don't make trouble for yourself with the IRS.