A taxpayer wants to deduct the mortgage interest and real estate taxes on their Schedule(s) E for some rental property. They have $20,000 in mortgage interest and $20,000 in property taxes split equally between four properties. One of those properties receives a notice that the property is considered substandard housing. How much of the mortgage and property taxes are considered deductible in the aggregate on the state return? $40,000 - The housing being substandard doesn't matter to deductibility. The house may raise issues with city and state fines or legal action, but it doesn't impact the return. $30,000 - Since a quarter of the properties are considered substandard the expenses are disallowed for that one property. $20,000 - The presence of substandard housing halves the maximum possible deduction for expenses connected to the real property trade and activity. $0 - Substandard housing is cause for immediate disallowance of these expenses