Question Part I: Since this is all going towards mortgage, I'm making no profit off of it. Do I still have to report this rental as income?
Be aware that while it all may be going towards the mortgage, the principle part of your mortgage is not deductible anywhere on your tax return. Only the interest is deductible. Additionally, the percentage of interest equal to your percentage of space rented is all that is deductible on the SCH E. Ditto for property taxes and insurance.
Question Part II: If I do have to report it, would I say that 50% of the house is rented, since its 2 of us?
No. Your rental percentage that that percentage of square footage that is "exclusive to the renter". Common use areas are not exclusive to the renter. So if the bedroom the renter uses is 100 SQ FT of a 1000 SQ FT house, that's 10%.
If the house has 2 baths and one of those baths is only accessible from the renter's bedroom, then you can include the sq ft of the bath also. Whereas if that bath is "across the hall" from the bedroom, it's not exclusive to the renter.
Also, when you are done double-check the amount of depreciation taken. Dollars to donuts the amount figured by the program will be wrong. To figure the correct depreciation, see IRS Publication 946 at https://www.irs.gov/pub/irs-pdf/p946.pdf and use the worksheet on page 37. For line 6 of that worksheet, table A-6 on page 72 is used.
