I am renting my previous house to a friend for less than fair market value. In exchange they provide me with peace of mind knowing that the house isn't vacant. I consider the fair market value less rent as services received so that rent+services received(i.e. house sitting) equals a fair market value. I plan to do this so that I can file Schedule E instead of counting the below fair market rent as just miscellaneous income for myself. Do I need to provide my friend with a 1099-misc because I'm claiming that they are paying me in services received and not just in rent payments?
No. Small Landlords Not Required To File Form 1099. Owning a rental property is an activity carried on regularly and continuously for profit, and many landlords consider themselves to be in business. However, the IRS considers most rental activities to be passive activities, rather than active businesses.
You may have already alluded to this: In general, if you receive goods or services from your tenant in exchange for rent, you must report the value of the goods or services as rental income on your return for the year in which you receive them.