Tax implications on renting Duplex to sibling who is also co-owner

[Bob Sacamano]

Hello!

I can't seem to get a straight answer online by searching for this. My situation is:

1. W2 income puts me in 35% tax bracket.
2. Purchased a duplex with sibling as co-owner that will occupy one half of duplex.
3. Other half is rented out.
4. My sibling's W2 income is 12% tax bracket.
5. Sibling will pay less than half of market rate for rental
6. Interest is ~34k, rent is ~1.8k for half rented, sibling will pay 800

I'd like to deduct the full property interest from my income, but I'm unclear on the best way to structure this. I see 3 options, but maybe there's more?:

Option 1:
- Claim half interest, depreciation, property taxes, insurance, etc., claim rental income
- Sibling claims half interest as primary residence.

Option 2: 
- Claim full interest, claim rental income from tenants and sibling

Option 3:
- Claim full interest, claim rental income from tenants and charge sibling close to full rental (1.6k)

	Option 1	Option 2	Option 3 (full)
Rental Income	21600	31200	40800
Depreciation	-4550	-9100	-9100
Interest	-16800	-33600	-33600
Taxes	-3000	-6000	-6000
Insurance	-500	-1000	-1000
Garbage	-300	-600	-600
Total	-3550	-19100	-9500

Option 2 is the best, but because it's so far below market rate, I'm not sure if it that would cause problems. I can easily gift my sister the difference tax free, but then I'd have to pay taxes on the income still.

Also, can I deduct the full property tax and depreciation or only half with option 1? I'm assuming I can only do half for everything.