On the rental worksheet, does it have a box for Completely Disposed of in a Taxable Transaction or something similar to that wording near the top?  That box should release the passive suspended losses.

See form 8582, and schedule E page2 if your client receives K1's

Hi,

The holding LLC has a 30% interest in a passive rental LLC and recieves a K-1 from the passive rental LLC. If the holding LLC disposes of its entire interest in the passive rental LLC, then the individual taxpayer owning the holding LLC should be able to allow the suspended PALs from the disposed interest in the underlying passive rental LLC on his personal return according to Treasury Regulation §1.469−4(g). However, I don't see a clear-cut way on ProSeries to allow the suspended PALs from the underlying passive rental LLC on an individual taxpayer's personal return when the individual taxpayer's holding LLC disposes of its underlying interest in an passive rental K-1. It seems to be easier to allow the suspended PALs in a situation where the individual taxpayer disposes of his entire interest in the holding LLC, but not when the holding LLC owned by the individual taxpayer diposes of its interest in the passive rental LLC.

Is there a way to allow the suspended PALs from the disposed interest in the underlying passive rental LLC on an individual's personal return if the individual's holding LLC disposes of its entire interest in the passive rental LLC?

I believe it will be reported on the K1, and form 8582 will have to be filled in. I believe it would show up in box 10 code ZZ, and the S-Corp would give you instructions. Not sure about 1065 K1, and you will need to look up instructions