Doesn't quite work that way. Your carry forwards as you know, can only be taken against passive income. But in the year you sell the property those passive losses can also be taken against other ordinary income. If you report the sale property in the SCH E section of the program, then the program will take care of all this for you.
Your losses from other income is limited to a max of $3000 a year (depending on your AGI).
Any more than that is carried forward every year and deducted until all used up.
- First your passive gain will be determined based on the passive income for the year, including any gain realized on the sale.
- Passive losses then reduce the taxable gain, and can very well reduce it to zero.
- Any left over losses are then deducted from "other" ordinary income up to a maximum of $3K each year until all used up.
