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I had this come up in a game i played sunday.

A small unit of saurus warriors charged my sorcerer lord who happened to have the 3rd eye of Tzeentch item (lets me borrow spells from enemy casters). My sorc easily survived the combat phase.

In my own magic phase i stole his slaan's lore of shadow spells, hit the saurus with -T and used the passive "smoke and mirrors" to swap places with my MoK chaos lord of choppiness.

Heres my question, am i allowed to use the lore passive ability if i dont actually generate spells from that lore?

You're confusing things by describing Smoke and Mirrors as a "passive" ability. The first two sentences of the ability description don't contain any meaningful rules. A model casting a Lore of Shadow spell, whether borrowed or not, satisfies the conditions for that third sentence.

After all, it doesn't say "a wizard who knows Lore of Shadows spells".