Real Estate CPA Help- Tax strategy - What am I missing?

[Ryan Wilson]

CPA question.  I am going to make up some easy numbers for thought experiment for a tax strategy, in my head for the future, but thinking I am missing something. 

Business owner (Joe) sales a small business ( not real estate related) and has long term capital gains of $1,000,000 in January.

Joe loves real estate and wants to buy a large multifamily for longer term income.  Joe buys a property for $2,000,000 and does a cost segregation study and gets a large first year depreciation loss of 25% or $500,000. Joe profits $100,000 from income from the property for the year.  Typically Joe would only be able to use $100,000 depreciation to offset the $100,000 income from that property (passive income) and possibly a very low amount based on income towards regular earning.

Taxed on $1,000,000  capital gains only.

Now, Joe also decides he love real estate so much he wants to become an agent, and Joe puts in enough time the same year of selling his business to qualify him as a "real estate professional" by IRS standards and makes $100,000 selling real estate.

What I can not seem to clarify is, now that Joe is a "real estate professional" in the same year he sold the business and had a large long term capital gain, can Joe use the remaining $400,000 loss from the property because as a "real estate professional" your losses are not limited to only offsetting  passive losses?

$1,000,000 capital gains - $400,000 loss from property + $100,000 earned as agent = taxed $700,000 capital gains   ????   Or

$1,000,000 capital gains + $100,000 earned as agent - $100,000 loss from property ( limited to income in real estate)= taxed $1,000,000 capital gains ???

I am looking for clarity on what losses can be used as a qualifying "real estate professional"?  I think this could be a good strategy, but never heard it talked about, so I am sure I am probably flawed somewhere within the tax code for income classifications.  Help me understand.

Thanks for your thoughtfully clarifying responses in advance,