Here's the deal with PALs and decedents and estates:
You can use suspended PALs to offset passive income on the final return but the excess PALs cannot be used since death is not considered to to be full disposition of the passive activity.
Carryovers of PALs to the estate is also not allowed.
However:
A deduction is allowed for the decedent's excess losses to the extent they exceed the excess of 1) the basis of the interest in the hands of the estate over 2) the decedent's adjusted basis [IRC Sec. 469(g)(2)]. In other words, a deduction for the excess losses is not allowed to the extent the estate receives a step-up in basis, as the step-up is granted instead of the loss deduction. If the excess losses exceed the basis step-up, the excess is deductible on the decedent's final return. If there is no step-up in basis for the passive activity at death, the losses are unsuspended and deductible in full on the decedent's final return.
See http://archives.cpajournal.com/1996/0796/depts/et.htm
