Whether the rental property has a mortgage or not is not relevant in regards to reporting the rental income received during the year. The rental income must be reported on a tax return.
Weather you pay off the mortgage or not is irrelevant. What you charge for rent is irrelevant. Who you rent to (family member, friend, other) is irrelevant. Rental income still has to be reported as such on SCH E as a part of your personal 1040 tax return. Do note that if you rent to a family member at less than the fair market rental value of the property, then you are not allowed to carry forward any losses on the rental business. Once your rental expenses get your taxable rental income to zero (..and they will) that's it. You're done. Any additional losses can not be carried forward. You just lose them permanently and forever. But the fact that your rental expenses will get your taxable rental income to zero doesn't matter. You are still required by federal law to report it. Don't forget that you are also required by law to depreciate the property. (The program will handle this for you automatically in the Assets/Depreciation section.)
@Carl wrote:
Once your rental expenses get your taxable rental income to zero (..and they will) that's it.
Every day an owner rents to a family member at below fair rental value is considered a day of personal use.
As a result, none of the traditional rental expenses are allowed (Section 280A); mortgage interest, property taxes, and casualty losses (if any) are reported on Schedule A.
To elaborate on @tagteam 's answer, when you rent to a family member below fair market value for more than 14 days, you must report the income as Other Taxable Income on Schedule 1, Line 8.