Generally, when a taxpayer disposes of their entire interest in a passive activity where all gain or loss is recognized, any prior year unallowed passive activity losses are:

When a taxpayer disposes of the entire interest in a passive activity, that activity is no longer subject to the passive activity rules. If the activity is disposed of in a fully taxable (as opposed to tax-deferred) transaction to an unrelated party, both current and suspended passive activity losses generated by that activity (as well as any loss on the disposition) can be deducted.