why there is no economic substance: Property management is a valid active business, and by making the setup above I am correctly segregating passive activity reported on Sch-E and active activity of property management through LLC-B.
What you stated above is exactly why there is no economic substance. You are segregating passive activity from business activity of property management solely for tax purposes. Can you state any reasonably valid, non-tax, reason for doing so? You can easily manage the properties without creating a separate S corporation, which you alone own and control, for management purposes. I mean, you're actually doing that now.
