The mortgage is not an expense, the amount you pay in interest on the loan is. A passive loss is first applied against passive income, but for income property where you actively participate (which would be the case here) you can take up to $25,000 of the loss against non-passive income. (Depending on your overall AGI as the amount is rateable for incomes over certain amounts.)
I agree with Tranquility. However, you probably should get at least a quick consult with a local tax professional, as there are somewhat complicated new rules regarding the capital gains exclusion for selling a primary residence, which are easier explained in person.
You will lose your capital gains exclusion if the home was not your primary residence for two of the last 5 years at the time the house sells. Also, you would lose some of the exclusion for the period of time that the home would be a rental property.
That may not matter much if you don't have a ton of equity in the property, or if you are close to being upside down at the moment, but its still something that it would behoove you to go over with someone local.