Hal_Al
Level 15

Deductions & credits

Until you put it to use as your primary or second home or as rental property, or sell it, you have an investment property. The carrying costs (e.g. insurance & utilities) of investment property are deductible as investment expenses, but are subject to being a misc. itemized deduction also subject to the 2% of AGI threshold. Real estate (property) tax may be deducted on schedule  A, under taxes, without regard to the 2% rule.

Alternatively, taxpayers can elect to capitalize (add it to your cost basis)  the carrying costs of unimproved and nonproductive real property, real property under development or construction and personal property before its installation or use (Regs. Sec. 1.266-1(b)(1)).  The election is made with the tax return by its due date, including extension, by attaching a statement. You cannot wait until you sell the property, but must make that election each year. Attach the statement to the return and write “Filed pursuant to section 301.9100-2” on the statement. 

Mortgage interest is only deductible to the extent of other investment income and not subject to the 2% of AGI rule,  but can be capitalized. 

You can claim the mortgage interest even though you are not the primary on the mortgage. If you classify the property as a second home, instead of investment property, then the mortgage interest is deductible on line 10 or 11 of schedule A (not subject to the investment income limitation) but then your other carrying cost will not be deductible (except Real estate tax).
Your cost basis is the fair market value on the date of death. This is ideally determined by a formal appraisal, but a realtor's estimate, proerty tax bill or even an internet site like Zillow may suffice.
If you rent, you report the rental income and expenses on schedule E. If you sell, you have a long term capital gain or loss based on the difference between net sale proceeds and your coast basis. You may deduct a capital loss on investment property but not on a second (or primary) home. A gain is taxable either way.