NY City Unincorporated Business Tax (UBT) on real estate

Client had to close his business years ago. The neighborhood changed to a residential one from mostly industrial. Realizing he couldn't sell the building as is for any worthwhile amount, he took on some partners and used their capital contributions to gut the building and create individual condominiums, which will be sold over a period of several years (he hopes).
The question is whether the operating losses from the rental activity can be subtracted from the Sec 1231 gains for NYC UBT? Ordinarily, income from real estate rental activities are exempt from the UBT, but can those losses be used to offset the Sec. 1231 gains?
My opinion is that all of the income is exempt because this isn't a regular business for the client. He is simply selling real estate. However, a colleague disagrees so I thought I should get other opinions.
Thanks for any guidance.
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Gary Goodman
NYC UBT is not anywhere near my tax expertise. That said, reading the NYC rules tells me the following: The partnership (I assume it is a partnership as you said you had partners.) is in the rental real estate business. As such they are subject to the NYC UBT. The business generates rental losses. This will cause an NOL that gets carried forward. (See NYC Form 204 and NOLD-UBTP instructions.) At some point a property is sold and a gain is realized on the sale. The NOL can be used to offset the gain before you get to the income subject to UBT.
Lastly, I have no idea what you mean when you say "this isn't a regular business for the client..... He is simply selling real estate." If he is only selling real estate then who is renting the condominiums generating the rental losses?
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