"We do not want to list the rent as income as it would be just enough to cover the mortgage and taxes etc. Is this ok?"--->Sorry. But no. Itis not OK;the house is considered to be your personal residence, not rental property.To be a rental property, you must charge an appropriate market based rent.But as you said, you do not wanna list the rent as inocme. As you are letting your daughter live there almost rent-free( I mean your daughter actually pays rent but you don't want to list it). So, you can not deduct the regular expenses,i.e., taxes, casulaty and theft losses, utilities, or annual accumulated depreciation expenses or etc. that you could otherwise if you charged market rent and list the rent form your daughter as your rental income. The house is your personal residence for tax purposes, a vacation home, not rental property. So, you can deduct both taxes and mortgage interest expenses on your SCh A as your itemized deductions if you claim'em.You can't file your Sch SE for the property for deductions of other expenses.
Also, if you are providing your daughter with free rent, it is a gift for your daughter;UNLESS you made a huge gift(s) exceeding $1.13,000 million ( assume your daughter is only your donee), you are not subject to gift taxation. However, you cannot charge her market rent and gift it back to her. Perhaps, the IRS would see through that ploy and would disallow it for the straw transaction that it is.
" Will we penalized for not charging Fair Market Value?"---> No. As said above,if you want, you may not charge fair market rent to your daughter and give her free rent. Then your property is considered to be a personal residence, not rental property,and you may be subject to your gift taxation if you made a huge gift excedding $1.13,000million before ( I assume that your daughter is onltyour donee) as said above.
Last edited by Wnhough : 11-06-2010 at 09:34 PM.
Reason: to insert a word