Great idea, then you will be subject to zoning laws about renting out your space, inspections from housing authorities to make sure you are in compliance with all codes and other regulations. Rent control records will have to be kept. You will have to apportion your mortgage deduction to reflect the % of your dwelling that is rented and you will have to calculate depreciation on the dwelling that will need to be recaptured when you sell. We are screwed especially if we are not in lock step with those who run things.
Zoning laws may or may not apply, depending on where you live. I would venture to guess that most zoning laws do not cover family members anyway, and this is likely one of those cases where there is a complete disconnect between legal definitions at the Federal and municipal level (i.e., a person may be considered a family member for zoning purposes even if they're not a family member for Federal tax purposes).
Rent control records (if applicable) would not be a problem because this would be the lowest rent anyone ever paid for living space.
As far as the other financial/tax aspects of your post, I say: "Bring it on."
1. I'll calculate the depreciation based on floor area -- to the one-hundredth of a square foot. Sure, I'll recapture and report that as a capital gain when I sell the home ... but I'll be deducting the depreciation on my tax returns in the meantime.
2. While I'm at it, I'll deduct all of the costs of keeping that living space in good working order -- including furniture and a pro-rated share of the utility costs that matches the pro-rated share of the living space that I calculated above for depreciation purposes.
3. And while I'm at it, I'll deduct the cost of groceries for these folks, too -- because that's supposed to be covered by the rent, too.
By the time all is said and done I could be showing quite a sizeable loss on my income tax return, largely by deducting legitimate expenses that would otherwise not be deductible except for the fact that my "family members" are now tenants. You can be sure I'd keep meticulous records of all these things.
My family won't be going on vacation next year. Instead, we'll be holding our lease renewal negotiations over the course of a 10-day trip to Hawaii.
That would make my portion of the cost of the trip (hotel, air fare, etc.) tax deductible, wouldn't it?