there are two court cases depending on which applies determines how to handle the mortgage interest and taxes
1) Bindsell TC Memo, 1983-411
here rental was less than FRV. The tenants, the owner's parents, were expected and did take unusually good care of the property so the tax court discounted the FRV by 20%. However, the owner charged less than the discounted rate that the TC came up with. so deductions were denied.
However, it would seem, had the amount charged by the owner been at or above the discounted amount then the rent and expense would have gone on schedule E.
2) Jackson, TC Memo1999-226
here too rental was below FRV and rented to the parents. nothing is mentioned about any mitigating circumstances. Rent had to be included in income and no rental deduction for the expense. I assume that taxes and interest as a second home could be taken on schedule A.
