A step-up in basis is a tax rule that applies to Joint Tenancy with Right of Survivorship (JTWROS) accounts when a co-owner dies. If the property was held as JTWROS and deceased father contributed 50% of the purchase price, 50% of its FMV at his death is includible in his estate, and is eligible for "step-up" in cost basis meaning you get an increase to current fair market value as of date of death or alternate valuation date. If your father contributed a higher percentage of the purchase price, it would be that percentage that is eligible for a step-up in basis. See Pg 10, Property Held by Surviving Tenant in IRS Pub 551
According to Reg. Section 1.163-1(b), Interest paid by the taxpayer on a mortgage upon real estate of which he is the legal or equitable owner, even though the taxpayer is not directly liable upon the bond or note secured by such mortgage, may be deducted as interest on his indebtedness.
As indicated, you would report the income and expenses on Schedule E (or C if you run a hotel-like service). The step up would affect your depreciation deductions. The interest expense would also affect direct expenses on Sch E of your 1040.
