For determining whether a home is used for rental purposes or for personal use, there are several factors to consider, but the applicable factor in this scenario is whether or not the related family member paid a fair rental price for use of the home. If they did not, then the use of the dwelling unit is considered to be personal use by the owner."
The properties cannot be considered rental properties. Thus, Schedule E cannot be used and the majority of expenses will not be deductible.
The IRS can rule that the rental is not a "for-profit" activity and disqualify your deductions.
As nonrentals, your primary deductions would be the mortgage interest and property taxes you paid on both properties. However, the IRS says a taxpayer may deduct these expenses only for a main home and a second home, and you can only have one main home at any one time.
