Depreciation and Expenses

My wife inherited a house from her father that is located about 100 miles away from our residence. She is allowing a family to live in it rent free in return for looking after the place. We may move there in 5 years.

Is there a way for her to depreciate the property and count other expenses on her taxes if no rent is collected? Could we charge rent but pay him the same amount for his services so that he still lives rent free? If so, how should this be structured?

Yes, you can charge rent and pay him the same amount for his services. In fact, that is what is required under the tax law in this situation. The amount of the rent and services should be the fair value of the rental.

If you do this, you can deduct depreciation and expenses as rental expense. However, you would have to send the tenant a 1099 showing the amount of rent for the year as income from services. The tenant would be taxable on that amount.

If you did not show the rent income for yourself and service income for the tenant, you would not be able to deduct depreciation and expenses.