When you sell a property, the passive loss from the property sold can effectively offset any capital gain on sale. One thing to keep in mind though when you sell a rental property, is depreciation recapture. The calculation is rather complicated but it essentially boils down to the following...
- Depreciation recapture is added to your basis (because you received tax deductions for it in the past) and therefore reduces the loss on sale of rental property. You can see this calculation on Form 4797, which is included in the year of your property sales. See this form, part III, here: https://www.irs.gov/pub/irs-pdf/f4797.pdf
- Most depreciation recapture is taxed, but at maximum 25% rates
- Long-term capital gain is passive and taxed at preferential rates. However, when you sell the property, the passive losses are released and will offset the gains in your income section.
- The passive activity loss offset is calculated on Form 8582, which you can see here: https://www.irs.gov/pub/irs-pdf/f8582.pdf (and in prior year returns if you've had losses).
- This answer explains the offset well too: https://ttlc.intuit.com/replies/5623827
