You are correct. However, the double counting of loss offsets (once of capital loss, then also of passive loss) is being "compensated" (my term) by reducing my taxable income. TT does this by changing the sign of the GAIN to NEGATIVE on the K-1 worksheet, so Schedule E shows the GAIN as a NEGATIVE number, thus REDUCING the AGI. This causes my tax liability to go DOWN as a result of the 1231 GAIN. And the IRS has a problem with that...:-)
