Unfortunately, the IRC considers a rental property rented for less than fmv to be a "rental not for profit" and you cannot deduct a loss on it, especially if you are renting to a related party.
Not Rented for Profit
If you don’t rent your property to make a profit, you can't deduct rental expenses in excess of the amount of your rental income.
You can’t deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year.
Where to report.
Report your not-for-profit rental income on Schedule 1 (Form 1040), line 8.
You have to be aware of the IRS Presumption of Profit Rules. 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.
For additional information refer to the following regarding a rental not-for-profit:
IRS Publication 527 page 16
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.
Pub 535 ch 1 not for profit activities
