Technically, your mom is renting out a part of her primary residence. However, she is renting to family, and she is renting at well below fair market rental value. If your mom did report the income as rental income on SCH E as a part of her personal return, (which I do not recommend) here's what it will show.
Since she is renting to family *and* renting at well below the fair market rental value, she is only allowed to deduct qualified rental expenses up to the amount of rental income received. Any excess deductions/losses are *NOT* carried over and are just lost and gone forever. This means that she will not pay taxes on that $300 a month income at all.
Next, your mom is required by law to depreciate that portion of her primary residence that is classified as the rental portion. This has a big potential to hurt your mom financially in the future, when/if she sells the house. That's because in the year she sells, she has to recapture all prior depreciation and pay taxes on that recaptured depreciation in the year she sells the property. Even if your mom qualifies for the "lived in 2 of last 5 years" capital gains exclusion, that exclusion does not include the recaptured depreciation. She "WILL" pay tax on that recaptured depreciation.
Overall, I seriously doubt your $300 month even pays one of her utility bills. So I recommend the two of you just consider it a cost sharing arraignment and not worry about it. Even if you live in a state that allows for a renters credit, your renter's credit on $3,600 of rent paid for the year would be negligible and not worth the time and paperwork involved.
