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an addition to the existing attached two-car garage. It had a
wall separating it from the garage and its own overhead garage
door.
In late 1999 or early 2000, petitioners began a woodworking
business, making Adirondack chairs, tables, and ottomans. The
garage workshop was used for this business. Petitioners claimed
and were allowed $346 of depreciation for the workshop on their
Schedule C, Profit or Loss From Business, attached to their 2000
Federal income tax return.
Petitioners sold the South Dakota property in February 2001
for $203,000. The house was purchased by a relocation company,
which priced the house by averaging two appraisals: One for
$200,000 and one for $206,000. Those appraisals valued the
workshop as a third-car garage; one valued it at $3,000 and the
other at $10,000.
Petitioners reported no gain on the sale of the South Dakota
property because the amount realized was not taxable pursuant to
section 121. See sec. 121(a) and (b)(2)(A). Petitioners
reported a loss of $9,731 on the same sale, all of which was
attributed to the sale of the workshop.
In 2000 petitioners moved to Cheyenne, Wyoming. They
purchased a house there in 2001 (the Wyoming property). After
purchasing the Wyoming property, petitioners converted the
existing attached garage into a workshop; as part of the
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