You had a $20k capital gain on the land that will be spread over the life of the note (using the IRS pro rata formula).  

He claims he has zero expenses outside of the pro-rata share of utilities, taxes, insurance.  

You get to depreciate fully rental use spaces, and deudct a pro-rata of all expenses. 

If you do an installment sale you will pay in the first year and subsequent years the pro rata depreciation recaptured through installment sale income reported on Form 6252.

So...in essence, Treas Reg Sec. 1.469-9(f)(1) functions as an "anti-abuse" rule of sorts to prevent a RRE professional from downsizing his own RRE activities in relation to his "managed" RRE activities.Treas Reg Sec 1.469-9(f)(2) provides a de minimis exception to (f)(1), and may very possibly allow the taxpayer in your client's question to achieve what he's trying to achieve, which is why I am so hyper focused on it.Treas Reg Sec 1.469-9(f)(2) prescribes that if a real estate professional elects to group all rental real estate activities, and the pro-rata portion of his/her gross receipts of rental real estate activities held as a limited partner is less than 10% of all gross receipts from all of his/her rental real estate activities, Treas Reg Sec 1.469-9(f)(1) will not apply. 

If someone goes on vacation for a few weeks, they don't get a "credit" for their non-use beyond their pro rata natural reduction in the overall bill for that month.

The parties agree that the monthly rent set forth above shall be increased or decreased pro rata (effective January 1 of each calendar year) to reflect any increase or decrease in real estate taxes.

Rentable office space means the usable square feet of the office space plus a pro-rata share of building common areas.

If the deposits support the gross receipts, use thelesser of the net income on the P&L statement divided by the number of statements (12 or 24) based on theBorrower’s pro-rata share of ownership or total eligible deposits reported on the bank statements divided bythe number of statements (12 or 24) for qualifying income.

You can take on investment partners, but then all expenses and proceeds are split pro-rata depending on the percentage of ownership for each partner.5.