For starters, when dealing with residential rental real estate, it will "always" operate at a loss each year "on paper" at tax time; especially if there is a mortgage on the property. So if they are renting at less than FMRV the losses claimed can not exceed the income received. This means the net taxable rental income will be ZERO for each year the property is rented at below FMRV. Additionally, carry over losses are just flat out now allowed when renting below FMRV - especially if renting to a family member. You just lose those carry over losses permanently and forever. Since you've declared that you're not renting with the intent of making a profit, you have two choices.
Since you are renting to a family member, you can just consider it a "cost sharing" kind of thing where all they are doing is paying your expenses for the property; i.e.; their "rent" covers only the mortgage interest payment, insurance and property taxes. Not a penny more. (probably less in reality). Then you just don't report anything concerning this anywhere on your tax return.
The other choice, and the one I recommend (for legal reasons) if the rent they pay you exceeds the total of the mortgage interest, property taxes and insurance paid, is that you report the income on SCH E, indicate that you are renting to family at below FMRV and just accept the fact you won't have any carry over losses to help offset taxable gains when/if you sell the property in the future. Be aware however, that without the carry over losses to offset capital gains realized when you sell, the depreciation recapture has the potential to result in a really big tax liability in the tax year you sell the property.
