Yes, small business assets are excluded under FAFSA. But the question is whether a LLC or other entity that does nothing other than hold or lease real estate is considered a “small business.” If the entity is simply holding the real estate, the answer is no. If the entity leases the real estate, the answer depends on the related activities. Most rental properties do not qualify as small businesses. If it doesn’t qualify as a “small business”, then the net value of the asset is reportable on FAFSA.
Income derived from rental and adding back in depreciation and other deductions is a whole other story.
@intparent - I think you meant to say that people do it for liability reasons. Most LLCs, for tax purposes, are disregarded entities.