Yes, the confusion is that your disallowed losses are "suspended" until such time as you can take advantage of them.
Treatment of former passive activities.
A former passive activity is an activity that was a passive activity in any earlier tax year but isn’t a passive activity in the current tax year. You can deduct a prior-year unallowed loss from the activity up to the amount of your current-year net income from the activity. Treat any remaining prior year unallowed loss like you treat any other passive loss. In addition, any prior-year unallowed passive activity credits from a former passive activity offset the allocable part of your current-year tax liability. The allocable part of your current-year tax liability is that part of this year's tax liability that‘s allocable to the current-year net income from the former passive activity. You figure this after you reduce your net income from the activity by any prior year unallowed loss from that activity (but not below zero)
Any passive activity losses (but not credits) that haven’t been allowed (including current year losses) are generally allowed in full in the tax year you dispose of your entire interest in the passive (or former passive) activity. However, for the losses to be allowed, you must dispose of your entire interest in the activity in a transaction in which all realized gain or loss is recognized. Also, the person acquiring the interest from you must not be related to you.
PUB 925
