how you determined that we would need to sell both properties before capturing carryover losses from either?
I may not have been clear enough on that.
If you combine two or more properties into a single enterprise, you can't realize your losses against "other" ordinary income until you have sold or otherwise disposed of the entire enterprise. Until that happens your losses each year will be limited to:
1) The rental income and;
2) The $25K you are allowed to deduct under current tax law that went into effect for 2018 thru 2025. (assuming you have $25K of "other" income to claim/deduct it from.)
Once you sell all of the assets of a single enterprise, then your realized losses are released in their entirety, with the possibility of other limitations based on other factors such as your AGI and the such. For example, one limitation may limit you to deducting a max of $3000 a year of your losses, until that loss is all used up in a future year.
See tax topic 409 at https://www.irs.gov/taxtopics/tc409 the part titled "Limit on the deduction and carry over of losses", which doesn't relate to your question directly. I can't find the IRS pub that does address your situation directly, as I thought I had it in my bookmarks. Apparently I don't.
