Your entire family needs to get to a proper estate planner (attorney) as soon as possible. There is literally a million dollars at risk in your case. Proper advice and planning is cheap at any price.
Let's start with some simpler points.
1. If you and your sibs inherit the properties, you inherit a stepped-up cost basis equal to the fair market value on the date your mother dies (hopefully many years from now). That insulates you from most of the capital gains your mother has accumulated over the years by appreciation of property values. However, if the property is gifted or transferred to you while your mother is alive (possibly to "avoid probate") you may lose the stepped up basis and pay a huge capital gains tax when you sell the property (and also have a severely reduced ability to claim depreciation).
2. If your mother requires long term nursing care, she will be required to pay for it herself until or unless she becomes "poor" enough to qualify for Medicaid. This could even require selling the properties to raise funds to pay for her care. She can't simply give away the property to her family to make herself "poor" as that will trigger Medicaid penalties.
So, #1 + #2 creates a strong need for proper estate planning to preserve the value of the properties your mother has accumulated so they can be passed on to the children with the least tax consequences to the children.
Now, after your mother passes, here are some points to consider,
3. If you sell the property, you will pay capital gains tax on the difference between the cost basis and selling price. If you correctly inherit the property, your cost basis will be equal to market value on the day she died, so there will be little to no tax. If you obtain the property in an unfavorable way, you will have to use your mother's adjusted cost basis, which is probably zero at this point (due to the effects of the rental, long story), so you would owe capital gains tax on the entire sales proceeds. Another reason to get estate planning done soon.
4. If you want to keep in the rental business, you have the option of forming an LLC or not. If not, each owner reports their share of income and expenses on a schedule E on their personal tax return. If you form an LLC, then the LLC files a form 1065 partnership return, and as part of the 1065, a K-1 is generated for each partner, which the partner adds to their personal tax return, showing their share of income and expenses. (Note that this kind of residential rental is the only time when filing as a 1065 partnership is option for people who are in business together. For any other kind of business relationship between two or more people, a 1065 is mandatory even if the business is not registered as an LLC. The only exception is a business relationship between two spouses and no one else.)
5. We can't tell you the advantages and disadvantages of registering as an LLC. LLCs are creations of state law, and laws vary from state to state. At the federal tax level, all partnerships are treated the same no matter how they are registered, unless they file a special form to be taxed as a corporation instead.
6. It's also possible that some heirs might want to be landlords but other heirs might want to be bought out and just take a lump sum; an attorney or tax professional can also help with that situation.
It's really too early to be thinking about how you will run your business after your mother dies. You need to get some estate planning done while she is still with you.
