How to handle taxes, interest, and expenses on guest house rented to my mother

[cply]

I purchased my mother's property/house 8 years ago on a 10 yr contract. Her property is immediately adjacent to our house.  I rent the house back to my mother at a greatly reduced rate, to help with her finances and furnish some of the utilities.   She can not afford the regular rent.  This way she can stay in her home, rather than move to a nursing facility, which would require her to go with Title 19 (Iowa) financing.   (We charge $300/;month instead of the average for our county of $975. for a 3 bedroom house)

Turbo Tax always suggests that we are not charging the proper amount for rent.

I have always treated this property as a rental property.  Should I be treating this as a guest house?

Should I be deducting the difference in rent as a loss?

[ColeenD3]

You should be treating it as a rental not-for-profit.

 Since you do not carry on your business or investment activity to make a profit, you cannot use a loss from the activity to offset other income. You do not therefore, need to depreciate.

Not Rented for Profit

Where to report.   Report your not-for-profit rental income on Form 1040 or 1040NR, line 21. If you are filing Form 1040 and you itemize your deductions, you can include your mortgage interest and any qualified mortgage insurance premiums (if you use the property as your main home or second home), and  real estate taxes on the appropriate lines of Schedule A (Form 1040). You cannot deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year.

Presumption of profit.   If your rental income is more than your rental expenses for at least 3 years out of a period of 5 consecutive years, you are presumed to be renting your property to make a profit.

More information.   For more information about the rules for an activity not engaged in for profit, see Not-for-Profit Activities in chapter 1 of Pub. 535.

[cply]

Thanks!  Very Helpful.