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estate taxes); plus (2) any deductions that are allocable to the
rental activity in which the rental use of the residence occurs
but that are not allocable to the rental use of the residence
itself. From the record it is clear that once petitioners
account for the mortgage interest and real estate taxes allocable
to the third floor units, as well as other expenses attributable
to their rental of the units, they will not have any excess
gross income from the units from which to take depreciation
deductions.
The parties agree that the carriage house is a separate
dwelling unit and that petitioners did not use any portion of it
for personal purposes during the years in issue. Thus,
petitioners’ deductions with respect to the carriage house are
not subject to the limitations of section 280A. The parties,
however, disagree as to the carriage house’s appropriate cost
basis for depreciation. Petitioners allocated their purchase
price of the property between the land and the improvements.
They then allocated a portion of the price allocated to
improvements to the carriage house based on its square footage as
a percentage of the square footage of the main house and carriage
house combined and added the carriage house renovation costs.
We agree with petitioners’ method of determining their cost basis
in the carriage house.
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Last modified: May 25, 2011