On February 3, 2011, Rebecca purchased a condominium apartment which she leases to her mother and grandmother in Seattle. She rents this to them at the local fair market value, which is $1,750 per month.

The apartment cost Rebecca $165,000. For the down payment she borrowed $20,000 (a second mortgage) from her mother at 9%, she makes monthly interest-only payments to her mother on the $20,000 sum. The second mortgage is due in a balloon payment in 2041 (if mom lives that long). She also obtained a 30-year amortizing, 6.5% first mortgage from a local bank paying 2 points (interest payment at loan origination) for the first mortgage loan on the remaining $145,000 of the purchase price.

For depreciation purposes, the tax appraiser suggested that 20% of the value should be apportioned to the land, with 80% to the apartment. Rebecca used the MACRS general depreciation method.

How much does she deduct on her tax return?