When a taxpayer rents a home to a relative on a long-term basis, the federal tax treatment of the residence depends on several factors. 

One of the primary factors of the rental's tax status depends upon whether the property is rented at fair rental value or rented at less than the fair rental value.

A fair rental is determined based upon facts and circumstances and by taking into account such factors as comparable rentals in the area.

Where the home is rented to the relative at a fair rental value, it is treated as an ordinary rental reported on Schedule E, and losses are allowed subject to the normal passive loss limitations.

When a home is rented at less than the fair rental value, it is treated as being used personally (Reg Sec 1.280A-1(e)(2)). Since it is rental property which the taxpayer is treated as using personally, the taxpayer would have to allocate the expenses between the personal and rental portions of the year.

However, since all of the rental days (at a bargain rate to a relative) are treated as personal days, the rental portion is zero. So none of the expenses are deductible, other than property taxes and mortgage interest, assuming the interest would otherwise qualify as second home mortgage interest.

Since it is not a rental, the income would be reported as “other income” (1040, Schedule 1, line 8i, activity not engaged in for profit income) and the mortgage interest and taxes deducted on Schedule A, assuming the landlord is itemizing deductions.

There also could be a gift tax issue depending upon the difference between the fair rental value and rent actually charged to the tenant relative. Of course, that amount would be prorated to each occupant of the home, so unless there was a large difference ($17,000 per each occupant, in 2023, up from $16,000 in 2022) between the fair rental value and actual rent, or other gifting was involved, a gift tax return probably isn’t needed in most cases.