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Petitioners contend that they may calculate the depreciation
deduction for their Crenshaw Blvd. property based on the total
amount of their payments of principal and interest over 30 years,
rather than the purchase price. Petitioners contend that their
method of calculating depreciation is allowable under sections
167(c), 1011, and 1012 and the underlying regulations, Crane v.
Commissioner, 331 U.S. 1 (1947), and Commissioner v. Oxford Paper
Co., 194 F.2d 190 (2d Cir. 1952). We disagree. Depreciation
deductions are allowed on the basis of property, sec. 167(c), and
the basis of property does not include interest paid on the
mortgage used to acquire the property, see secs. 1012, 1016.
Residential rental property placed in service after December
31, 1986, has a recovery period of 27.5 years and is depreciable
using the straight-line method. Sec. 168(c), (b)(3)(B). The
applicable convention for residential rental property is the
midmonth convention. Sec. 168(d)(2). Petitioners improperly
calculated depreciation by using a useful life of 17.5 years,
based on a full year of ownership for 1999.
We conclude that petitioners may deduct depreciation with
respect to the Crenshaw Blvd. property for 1999 calculated by
first subtracting the amount allocable to land from the purchase
price and then, for the remaining amount, applying the straight-
line method of depreciation over 27.5 years using the midmonth
convention based on purchase on May 3, 1999. The parties shall
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