A Qualifying Relative does have to be related to you or live with you all year. Living in your 2nd home does not count as living with you. A Mother-in-law meets the relationship test, but an Aunt-in-law does not. However, if you file a joint return with your spouse, then you can claim your spouse's aunt.
Social security doesn't count
as income, for the income test, but social security money she spends on her
self does count as support not provided by you, for the support test. Money she
puts into savings & investment does not count as support she spent on
herself. Note that a parent (or parent-in-law) is closely related so there is no requirement that
she live with you at any time, during the year. But if you provided a home it
helps your support case. If no one person
(or married couple) provides 50% of the support (for example your brother-in-law is also sending support), then a "multiple support agreement” (IRS Form 2120)
can be used, to allow you to claim the dependent. https://www.irs.gov/pub/irs-pdf/f2120.pdf
The IRS has a worksheet that
can be used to help with the support calculation. See: http://apps.irs.gov/app/vita/content/globalmedia/teacher/worksheet_for_determining_support_4012.pdf The support
value of a home is the fair market rental value, divided by the number of
occupants.
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I agree that you do not have a rental situation and do need to report rental income. You do not need to report the income, regardless of whether the residents are your dependents or not. It is not an either/or situation.
