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implemented regulations to remove items of gross income equal to
net income from the entire activity, but the Secretary instead
implemented regulations to recharacterize net income from a
specific item of self-rental property. The use of the term “item
of property” leads us to conclude that respondent’s
interpretation of the regulation is correct. Accordingly, in the
instant case, self-rental income from the Bear Valley Road
property is removed from the passive activity loss computation,
leaving no passive income to be offset by the passive loss on the
John Glenn Road property.
Section 469(d)(1) defines passive activity loss as the
excess of losses from passive activities over income from passive
activities. Consequently, recharacterization of “self-rental
income” under section 1.469-2(f)(6), Income Tax Regs., as not
from a passive activity effectively removes the income from the
passive activity loss computation. Removal of a single item of
income from such computation does not affect the passive
characterization of items remaining within the activity. See
Shaw v. Commissioner, supra. “Under the self-rented property
rule, the net rental income from self-rented property is treated
as nonpassive income and the net rental losses are treated as
passive losses, even though the rental activities are passive
activities.” Id.
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Last modified: May 25, 2011