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however, petitioners' modified adjusted gross income was greater
than $150,000, with the result that the $25,000 offset was phased
out.5
Petitioners argue that they meet the requirements of the
section 469 material participation test in that the rental
properties were petitioners' former homes rented out and
petitioner materially participated in their active management.
Additionally, petitioner contends that, pursuant to section
469(i), their passive losses should be exempted by the $25,000
offset (to the extent of the phaseout) for rental real estate
activities.
Respondent argues that the exception provided in section
469(c)(7) for certain taxpayers who materially participate in a
real property business does not apply to the years in issue. We
agree. Section 469(c)(2) provides the general rule that the term
"passive activity" includes any rental activity. Section
469(c)(4) provides that section 469(c)(2) is to be applied
without regard to whether or not the taxpayer materially
participates in the activity. For taxable years beginning after
4(...continued)
not exceed $25,000.
5 Sec. 469(i)(3)(A) provides:
(A) In general.--In the case of any taxpayer, the
$25,000 amount under paragraph (2) shall be reduced
(but not below zero) by 50 percent of the amount by
which the adjusted gross income of the taxpayer for the
taxable year exceeds $100,000.
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