Thank you both. 

Best case, they engaged an attorney to write an operating agreement that will help the family manage and use the property over the years, maybe even generationally.

Today I got the facts:

1. Mom gifted house and money to the kids for estate planning. Then the kids formed the LLC/partnership and contributed the house to it.

2.  The Mom rents the house at an arms-length transaction.  I think this is what qualifies them for trade/business treatment.

3. There were no other tenants. 

Active/Passive/Material participation was an issue that arose.

The use of an LLC to own commonly managed assets that could be income producing or at least could appreciate is not all that unusual. 

The estate matters are outside of my tax practice. Thank you for the learning, Karen.