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entitled to deduct expenses under section 212(2).2 See Mitchell
v. Commissioner, 47 T.C. 120, 128 (1966); Thomason v.
Commissioner, T.C. Memo. 1997-480; sec. 1.212-1(b), Income Tax
Regs.
The Court concludes from the record that petitioners'
activities with respect to the property for 2000 were of two
separate types, a rental activity and an investment activity.
"If the taxpayer engages in two or more separate activities,
deductions and income from each separate activity are not
aggregated either in determining whether a particular activity is
engaged in for profit or in applying section 183." Sec. 1.183-
1(d)(1), Income Tax Regs.
Because petitioners' property was used for more than one
activity, one of which was not for profit, petitioners must
allocate deductions relating to the property on a reasonable
basis. Sec. 1.183-1(d)(2), Income Tax Regs. Because
petitioners' mortgage interest and real estate taxes are
specifically allowable as deductions under sections 163 and
164(a) without regard to the use of the property for profit, no
allocation between the activities is necessary. Sec. 1.183-
1(d)(3), Income Tax Regs.
2
The deductions would appear to give petitioners a passive
activity loss. See sec. 469(c)(1), (6)(B). Petitioners,
however, are treated as "materially participating" in the
investment activity under test two of sec. 1.469-5T(a),
Temporary Income Tax Regs., 53 Fed. Reg. 5725 (Feb. 25, 1988).
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