Philip and Margery Skalka - Page 6

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               On July 6, 1977, petitioners purchased a two-story                     
          residential property (investment property) at 7708 Bay Parkway,             
          Brooklyn, New York.  For approximately 20 years, petitioners                
          rented the two-family investment property to various tenants.  In           
          addition, the testimony of Philip Skalka (petitioner) maintained            
          his dental office on the second floor.  Petitioner testified that           
          he depreciated the investment property over a 20-year period.               
               On October 27, 1997, petitioners sold the investment                   
          property for a gross sale price of $297,500.  Petitioners                   
          reported the property sale on Form 4797, Sale of Business                   
          Property.  On Form 4797, petitioners reported a cost or other               
          basis in the property of $85,611.69 and depreciation allowed or             
          allowable of $59,187.69.  Accordingly, petitioners reported an              
          adjusted basis of $26,242, for a total gain from the sale of                
          $271,076.  Petitioners further reported on Form 4797 that $32,029           
          of the total gain was from section 1250 property.  Petitioners              
          subtracted the $32,029 of reported section 1250 gain from the               
          total gain amount to arrive at a capital gain of $239,047.                  
          Petitioners included the $239,047 of capital gain as income on              
          their 1997 tax return.  However, petitioners did not include the            
          $32,029 of section 1250 gain in income.                                     
               Using Schedule D, Capital Gains and Losses, petitioners                
          determined their 1997 Federal income tax using the maximum                  
          capital gains rates.  In the tax computation, petitioners                   





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