if it is the home is titled in your name and below market rent is being charged the tax laws would require you to treat this as a personal residence. this would bar you from deducting most expenses except taxes and interest and those expenses would go on schedule A not schedule E.
the following is based on a tax court case.
a taxpayer is deemed to have used a dwelling unit
for personal purposes on any day that it is used for personal
purposes by any member of the taxpayer's family, unless the
family member rents the dwelling unit at a fair rental for use as
their principal residence. See sec. 280A(d)(2)(A) and (3)(A);
Kotowicz v. Commissioner, T.C. Memo. 1991-563.
Since the family members paid less than fair rental based on an appraisal
of what fair rental was by a local real estate agency, their use of
the property is treated as petitioners' personal use for every day of the taxable
years in issue.
Section 212(2) allows as a deduction all the ordinary and
necessary expenses paid or incurred during the taxable year for
the management, conservation, or maintenance of property held for
the production of income. Section 262(a) provides that no
deduction shall be allowed for personal, living, or family
expenses.
The only expenses which are
deductible by petitioners are
those expenses which are deductible without regard to whether it
was rented. See sec. 280A(b) and (e)(2).
We hold that petitioners are entitled to additional Schedule A
itemized deductions for the foregoing amounts of interest and
taxes paid on the property under section 163(h)(3) and
section 164(a), respectively.
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thus the tax issue for you is whether the family member is paying fair rental value.
