Legitimate reasons compel a real estate holder to isolate his properties in separate LLCs. If prudently operated (including reasonable insurance), an LLC:
(i) should insulate its members from entity-level liabilities and
(ii) should insulate the LLC's assets from the liabilities of its members and from liabilities of other LLCs.
Insulation has an added benefit when the real estate holder has both property for sale to customers in the ordinary course of business ("Dealer Property") and investment properties. Bad results happen when real estate becomes Dealer Property such as loss of favorable rates on gains (about 15% higher rates) and the inability to use like-kind exchanges and installment sales. The only real benefit of Dealer Property is ordinary loss treatment (rather than capital) if it is sold for a loss. Of course, a better tax result is little solace to the holder selling at a loss.
Partnership tax law allows a holder to isolate his Dealer Property in a separate LLC and not taint the investment status of real estate he holds individually or in another LLC. This planning should be done when the real estate is acquired. Please note that the LLC should be a true tax partnership (have two or more members). A single-member LLC is generally a disregarded entity and will not work for this purpose.