Joseph A. Morcos and Joann M. Morcos - Page 13

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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                 
               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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