I deducted property-related expenses, such as mortgage interest, property taxes, and maintenance costs, from my taxable income.

The NC return is correct as is in my opinion.Remember that states often piggyback off Federal amounts, often AGI or taxable income (then make upward or downward adjustments for things like 179 or depletion).Since the passive loss did not enter the taxable income calculation at the Federal level, it won't flow to the state return when NC piggybacks.

The fantasy that it makes anything cheaper is just that, a fantasy.     

It may be cheaper to only increase rent by $X amount, rather than spending tens of thousands on renovations and absorbing vacancy losses. 

Older, cheaper properties in C & D class neighborhoods are notorious money pits.

I don't have a hard and fast, here is what my criteria was when I started:1) Covers enough so its cheaper then renting2) Room to improve rent: addressing poor management or by improving the unit.I figured in my market with fixed debt and rent increases, within 3 to 5 years, the cash flow would be real nice.

Selling for $1M with a $100k mortgage is not taxable, if you paid $1M for it.

A homestead usually helps with lowering taxable value, but it's kind of screwing me over in this situation.

However, I think from a financial perspective, it's likely a better idea to pay off the debt or add the money either to a taxable brokerage account or a retirement vehicle like an IRA.

Buying a duplex may offset living expenses, and may be a few hundred dollars cheaper than renting.