You make extra cash (all taxable) but the longer the stay, the higher the cost.

This means that if you dispose of your entire interest in the activity in a taxable transaction (e.g., you sell your investment), you may be able to use any remaining suspended passive losses to offset other forms of income, including non-passive income like W-2 income.It's important to note that tax laws and regulations can be complex, and the treatment of passive losses can vary based on individual circumstances and changes in tax laws.

So after selling costs you may not have any/much taxable gain?

The three most common approaches include:Cost approach: An estimate of the replacement cost less depreciationIncome approach: Calculation of estimated potential rental incomeSales approach: Uses comps of recent transactions on similar propertiesBe sure you are leveraging the tax incentives availableIdentify any applicable tax incentives available for commercial properties - historic tax credits in certain areas, opportunity zones, environmental sustainability, etc.Understand available tax deductions, credits, and rebates - Tax deductions decrease the taxable value of a property, tax credits directly reduce your tax liability dollar for dollar and tax rebates are a refund of taxes paid under certain conditions.Utilize a cost segregation study - Cost segregation allows you to reclassify assets into categories with shorter useful lives, therefore accelerating depreciation and creating tax savings.Leverage energy incentives and deductions - Look into the Section 179D deduction and how you can save on tax by meeting certain standards to make your property more environmentally friendly.Best practices for commercial real estate owners and monitoring their property tax regulations:Plan proactivelyWork with a professional to receive guidance on complex regulationsUtilize specialized software tools to drive efficiency and compliance.What questions do you have regarding property tax valuations?

But second, you’re also making your tax free gain, taxable.

Is the $125,000 taxable as a capital gain?

A structured installment sale is a highly beneficial tool when looking to exit an property (investment or otherwise) because it'll lower your taxable income and is customizable.

Obviously, the interest I earn from lending would be taxable income, but how would the initial investment be treated for tax purposes?

They are hoping to sell this land to purchase different land and would like to eliminate a taxable event.

Consider a cost segregation study for your rental properties to accelerate depreciation deductions, significantly reducing your taxable income.