To decorate your house with custom artwork, first your sim must have a creativity level of 5 and be able to paint a still life.
Have your sim paint and a frame will appear that you can center on whatever you want to paint. If you want to paint a picture of something outside the Sims 2 game, just press C anywhere at this time. This will pause the game.

Use Alt + Tab to exit the game, then open a picture program such as Paint and open the snapshot you just took, it will usually be in the folder: C:\My Documents\EA\Sims2\Storytelling\Snapshot.bmp

Then, you also have to open the picture you want to have in your game. If your picture is too large resize it so it will fit in the original snapshot from the game.

Copy your custom picture on to your snapshot from the game, then save the picture. Use Alt + Tab to get back to your game and your sim will start painting your own custom picture.

Using this trick you can put pictures of your friends or family, web pictures, or anything else in your Sims 2 game.