Rental income but not Fair market value

It depends.  The IRS requires a 'for profit' rental to be able to use expenses against the income received for renting a home.

Presumption of profit According to IRS.

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. This means you don't have to show a profit every year, but must be trying to achieve a profit.  Lower than fair rental value (FRV) for the rent being charged is a determining factor.

If  you rent it at less than FRV then the income is still reportable and taxable, however it is reported differently.  See the information from IRS Publication 527. Each of the sisters would report their share of income and allowable expenses below if itemized deductions are allowed.

• 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 8j. If you itemize your deductions, include your mortgage interest (if you use the property as your main home or second home), real estate taxes, and casualty losses from your not-for-profit rental activity when figuring the amount you can deduct on Schedule A.

Essentially the expenses are allowed as itemized deductions if you use this as your home or second home.  If not, you an use only the real estate taxes, and casualty losses if applicable.

Reporting the income as Not for Profit:

Sign into your TurboTax account:

1. Click Wages & Income > Scroll down to Less Common Income. 
2. Select Miscellaneous Income, 1099-A, 1099-C
3. Select Other reportable income
4. Select Yes to Any Other Taxable Income?
5. Enter a description and amount