You're not applying it against the depreciation per se. The IRS states, "Generally, you may deduct in full any previously disallowed passive activity loss in the year you dispose of your entire interest in the activity.
Also, PALs not allowed in the current year are carried forward until they’re allowed either against passive activity income; against the special allowance, if applicable; or when you sell or exchange your entire interest in the activity in a fully taxable transaction to an unrelated party.
A fully taxable transaction is a disposition in which you recognize all realized gain or loss.
Form 8582
