I live in nj but I but I bought a home in ny state for my sister and her family. She pays me rent. Less then the mortgage. I do not live in the home and did not live in the house for even one day in 2006. I work in nyc and rent in nj. I am not considered a ny resident am I?

No you are a landlord there, you own a rental house there. At a lost which could be a tax issue, since you are not in the rental business to make a profit, so it could effect the tax deductions since it is not really a business.

Rental properties almost ALWAYS show a paper loss due to the depreciation deduction. However, if the rent you charge at least approximates what is fair market value for the house, you should have no problem tax-wise.

You WILL need to file a NY state tax return, as well as one for NJ.