Eeyore1954

Unless there are some missing facts I say the gain should be allowed to offset passive losses now that the entire balance has been paid.

Income from the sale or other disposition of passive activity is generally passive income if the activity was a passive activity in the year of sale (Reg. § 1.469-2T©(2)(i)). Similarly, income from the sale or property used in a passive activity is passive income. If there is overall net income on a disposition (gain on the sale exceeds the current and prior years losses), income and losses should both be reflected on the same line of Worksheet 1, 2 or 3 of Form 8582. From http://www.irs.gov/businesses/small/article/0,,id=146336,00.html

But I am "certain or was certain" the gain on a sale of a passive activity is allowed to offset passive losses from other properties. In an installment sale current and suspended losses may only be deducted in the same ratio as the gain reported. If the remaining proceeds were paid in 2006 I do not see why that gain should not go onto the worksheets on form 8582 and allow other losses. It wasn't a sale to a related party was it.

But upon what basis are they saying it is not a passive property. Usually most rentals are automatically passive. Was it a vacation home with personal use of more than 14 days?

Shouldn't they first have been allowed to offset all losses (including suspended) on the property that was disposed of and then any excess gains should go to allow losses on the other properties. I would say the IRS is incorrect unless the IRS is saying the property that was disposed of was not a passive property or some other facts that we do not see here.