I purchased a town house this year and am renting it to a family member for less than the amount of house mortgage payments and property taxes. I will claim all rent paid as income and plan to deduct expenses for repairs. I plan to adjust the cost basis of the house by the cost of replacing a hot water heater. Is this proper? If the tax code does not allow me to rent the house for less than fair market value, how do I establish fair market value, since market value for rent might still be less than mortage payments and taxes?
