A client with pent up passive losses will also sometimes strategically take cash enough to offset some passive losses.There are two times you can receive cash - At the closing of the sale your intermediary can identify the amount you want on the settlement statement and you get it at the closing - taxable of course. 

I got killed in 2018 taxes even with no TX state tax, so reducing taxable income this year (and going forward) is also part of the strategy. 

If I made a purchase and only broke even after 20 years, meaning that I never recorded any actual taxable income but the property is completely debt free after 20 years, is that a highly desireable situation? 

If I need to withdraw some owner's capital, which as far as I understand is not a taxable event, should I report it in Schedule E on tax return?

@Justin MarshallUsing your IRA is possible, but there are several restrictions you need to avoid or your IRA could be disqualified and become immediately taxable. 

The way you structured this is probably the highest taxable way to do it.

Assuming so, that leaves $30k taxable, on top of the $5k. 

@Beth CassidyThere doesn't appear to be a taxable event unless you sell the property or there was a partnership agreement and you buy out his partnership interest.You can also make the argument that he doesn't deserve the full 50% - he couldn't qualify to be on the loan when you did the refinance - therefore all the risk was on you had there be any issues with the property.Easiest solution - sell the property.

So if you sell you would not have any or much of a taxable event. 

As I tell all wholesalers, remember that assigning an agreement of sale is a taxable event in Pennsylvania.