When you rent out your condo you'll tally up all the rent received and then you deduct from that amount all expenses to come up with your profit/loss. The portion of your mortgage payment that goes toward principal is not an expense that offsets rental income, so just because it would rent for less than your mortgage payment doesn't necessarily mean you'd have rental loss (though it's likely).
Here are some common rental expenses:
- mortgage interest
- HOA dues
- property tax
After the dust settles on rent vs expenses you'd have your profit or loss from renting. Losses may or may not help your tax situation, it depends on your income and whether or not you are a real estate professional, if your modified AGI is over $150k and you aren't a real estate professional, your rental losses can't offset ordinary income, so no benefit. However, it still may be better than selling at a loss presently, as you are building equity with each payment.
Regarding an LLC, there's not a strong need to form an LLC for rentals but many do choose to do that, rather than selling your property to the LLC you'd most likely want to transfer it as a capital contribution. If it's a single-member LLC (and you don't elect to be taxed as a corporation) then for tax purposes it is no different than if you didn't have an LLC.
When you sell the condo, if it's within 3 years of moving out you would still qualify for the capital gains exemption from selling your primary residence, but if it is currently underwater that might not be a concern.
I'd suggest a lot of research before diving in, there are a great many sites/forums dedicated to landlords and it may be worthwhile to consult with a tax professional to get advice that is tailored to your specific financial situation.
One more important thing to factor in to your decision that many get mixed up on:
While you need to depreciate a rental property and that depreciation expense does help offset income each year, it comes back around when you sell the property (depreciation recapture) unless you sell at a loss or sell it and buy another rental property (but that just kicks the tax can down the road).
Finally, buying another property without selling your current one means you need to have enough income to have an acceptable debt to income ratio with both mortgages factored in, lenders will typically not give you credit for potential rental income, my lender counts ~70% of my rental income and only started doing so after I had shown rental income on 2 tax returns.