My wife and I own our house where my mother in law lives in the basement and pays 1200 a month for living there,utilities and other expenses. No rental agreement

[tcasdorph]

The house isn't zoned for a rental and no rental agreements exist

[Hal_Al]

Fugetaboutit. You don't have a rental, you have family sharing expenses.

If this is merely a cost sharing arrangement where the amount paid is below fair market rental, there would be no reportable income to you. If the “rent” amount is fair market value, or more, there is still some question as to whether you even have to report it, as it almost always comes out zero. Most people take the attitude that it is not income; it's just room mates sharing expenses and ignore it. Family, as opposed to unrelated roommates, makes that position stronger.

What you are NOT allowed to do, because it is your own home (you have "personal use") is claim a loss from this activity, to offset other income. Because of the "personal use rule", your deductions are limited to your income. Net effect ZERO.