It is retracted. Lots of earlier aircraft had gear that pulled only partially into the engine nacelles. The D18 Beech that I first posted, the famous DC3, even the early Twin Bonanza and the Piper Apache all had gear that only partially retracted.

Retracting the landing gear longitudinally into an engine nacelle was a simpler arrangement mechanically, and the typical speeds of those aircraft were less than 300mph so the small, round projection of the partial wheel did not contribute significant drag.

All of these images, incidentally, are FSX grabs and not photos of the real airplanes modeled.