HELP - Unallowed Passive Activity Loss on retired property

Not sure why he is being audited, but I can't imagine it's because he took the freed-up passive losses upon retiring the property. By "retiring" I assume you mean he sold it? If he didn't sell it in a "taxable transaction" then he might still have to wait. If by "retiring" you mean he stopped using it as a rental and turned it into something else, that would not be a fully taxable transaction, so I believe he would have to wait until he later sells it, to free up the losses.

Here's another vote to agree with Amy. You must "dispose" of the entire interest in the assets before triggering the suspended losses. Just taking it off the market and still owning it is not good enough.

First, thanks for your comments, here is a slight twist - my client spoke with the auditor yesterday, and he isn't questioning taking the loss, he is just questioning the amount, and how we came up with it. The amount is large, way above the normal $25K yearly limit. The auditor wants to see the Lacerte workpage to see how it came up with the calculation! I am thinking it's a good sign!?!

Tell the auditor that it does not matter how much the suspended losses total, it matters only if the taxpayer disposes of the entire interest in the activity. Most dispositions will have either a gain or a loss, so that number also gets taken into account. If you have $1million of losses accumulated, you can use them all! Then you might have an NOL for carryback.