To add to tagteam's answer: yes, you can generally use an accumulated passive loss to offset non-passive (ordinary) income in the year that you dispose of (sell) the passive activity.
A little more background explanation: Passive activities often generate losses -- particularly rental properties. Rental properties may bring in enough rental income to make for a positive cash flow after paying mortgage, taxes, insurance, etc. but they will show a loss for tax purposes due to depreciation expenses. In some cases, these passive losses can be used in the year that they occur to offset "ordinary" income, such as wages and business income. But the exception that allows for up to $25,000 of passive loss from a rental property to offset ordinary income is limited by adjusted gross income, so it isn't available for everyone and passive losses can build up over time.
The general rule with passive losses is that they can only be used to offset future passive loss income. But, when you dispose of your entire interest in a passive activity (that is, when you "get out of the rental biz"), you are generally able to take all of the suspended losses for that activity that have built up over time. That loss can be used to offset any gain from selling the activity and it can also be used to offset "ordinary" income -- your wages and other business income. [Note: the disposition transaction must be one in which all realized gain or loss is recognized and the person acquiring the interest must not be related to you. So -- installment sales, for instance, won't allow for the entire loss to be taken. A sale to your kid also won't allow the loss to be taken.]
You can find more detail than you ever thought you wanted at the IRS Topic no. 425, Passive activities - Losses and credits, which includes a link to IRS Publication 925, Passive Activity and At-Risk Rules
In TurboTax, you'll tell the software that you are disposing of (selling) the entire activity -- that this is its final year. Make sure you have your carryover information from the prior year return so that you know what the accumulated disallowed loss amount it. The software will then apply the loss against the sale of the activity and your other income as necessary.
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-- KimberW
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-- KimberW
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