Assuming taxpayer is not a real estate professional, doesn't below seem to indicate that the capital gain from this sale can be offset by passive activity losses from other activities?
https://www.irs.gov/pub/irs-mssp/pal.pdf
Pg 79/154 from IRS Audit Guide:
"Passive losses are generally deductible only to the extent of passive income. However, current and suspended losses are fully deductible if there is a “qualifying disposition.” Under IRC § 469(g), a “qualifying disposition” requires three criteria:
1. Disposition of an entire interest (or substantially all[1])
2. In a fully taxable event (where all gain/loss is realized and recognized).
3. To an unrelated party.
If these three tests are met, losses are fully deductible against non-passive income (unless the taxpayer has basis limitations). Thus, in the year of disposition, losses allocable to the passive activity may offset portfolio and other investment income or may become part of a net operating loss. We have no regulations governing dispositions. Thus, we must look to IRC § 469(g) and legislative history[2] for guidance."
Pg 85/154 from IRS Audit Guide: "Reg. § 1.469-2T(c)(2)(i)(A)(2): Gain on disposition generally is passive income if the activity was a passive activity in the year of disposition"
Pg 84/154 from IRS Audit Guide: "Gain on Form 4797 and Schedule D should first offset losses from the same activity. If any gain remains, it offsets losses from other unrelated passive activities."
