This is a complicated one, but I will try to make it as easy as possible. A passive loss carryover means there is a loss that cannot be matched to a passive activity, therefore it must be carried forward for another year until it can be used.
When an estate has passive activities (a passive activity is any activity involving a trade or business in which the taxpayer does not materially participate- a very common passive activity is rental properties), it is income to the estate and there are taxes paid by the estate on it.
If the estate had another passive activity that lost money then there would be a passive loss. The passive loss can be deducted from the passive activity to pay less tax.
If there is no passive activity that makes money but there is a passive loss for that tax year, the passive loss cannot be used against regular tax income, it must be carried to the next year and years after until either there is a passive activity that lost money or the estate closes.
See definitions below.
Passive activity losses (PALs) are generated when a taxpayer incurs ordinary losses in a passive investment - typically a hedge or private equity fund, or real estate. Because the taxpayer does not “materially participate” (i.e., is only an investor), the government does not allow these losses to offset other non-passive income. Instead, these losses are suspended until the taxpayer has other passive income or fully disposes of the investment from which they were generated (unless sold to a related party), at which point the losses may be used. If neither occurs, PALs accumulate and carryover year-to-year.
A passive activity is any activity involving a trade or business in which the taxpayer does not materially participate. Material participation is defined as regular continuous and substantial activity rendered on behalf of the trade or business. Real Estate and rental activities are generally, per-se, passive. In determining Material Participation the IRS has described seven (7) tests. The most well-known of which, is that the individual participates in the 2 activity for more than 500 hours. Activities of a spouse may be counted and there is a special 100 hour test which is also available.