Bruce and Judy Bailey - Page 15

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          Lake Arrowhead Property                                                     
               Respondent maintains that petitioners are not entitled to              
          deduct losses generated from their Lake Arrowhead property in               
          1996 and 1997, because the Lake Arrowhead property is real estate           
          held in a trade or business subject to section 469(c)(1), rather            
          than a rental activity under section 469(c)(2), and petitioners             
          have not established that they materially participated in the               
          trade or business of renting their Lake Arrowhead property as               
          required by section 469(c)(1)(B).                                           
               Petitioners argue that they properly filed an election                 
          pursuant to section 469(c)(7)(A)(ii) to treat all of their                  
          interests in rental real estate as a single rental real estate              
          activity and that their activities related to the rental of their           
          Lake Arrowhead property should be considered in aggregate with              
          their other rental properties.  As previously explained,                    
          petitioners’ argument fails because the election to treat all               
          rental properties as one activity is limited to the purpose of              
          determining whether a taxpayer is a real estate professional                
          under section 469(c)(7).  Here, the average period of use of the            
          Lake Arrowhead property was less than 7 days in 1996 and 1997;              
          thus, the rental of the Lake Arrowhead property is not a rental             
          activity as defined in section 469(j)(8) and is not a passive               
          activity under section 469(c)(2).  See Scheiner v. Commissioner,            
          supra; Mordkin v. Commissioner, supra.  Nevertheless,                       

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Last modified: May 25, 2011