I can't figure it out either, I have the knife and the camera, it lets me cut my hand but I can't do anything past that. I've tried taking a picture of it, doing it in different rooms, it isn't working. Is there something I've missed?
EDIT: I found out how to do it, talk to nanami in the kitchen until it gives you a text box, then type "polaroid" with the camera in your inventory, go to the bathroom and hidden behind the toilet is a knife you can use to cut the photo.