Accountants: Sale of Rental Property in LLC - Ordinary Income or Capital Gain?

[Matthew Schroeder]

Dear All,

Are there any wise accountants out there?

The Situation: The LLC in which I own a 50% interest sold a rental property last year and recorded a large gain on the sale. I had considered this a "capital gain" and thought it would flow through from my K-1 to personal tax return as such, and as a result, I consciously sold a significant amount of my "under-water" stocks at a loss to try to "offset" that gain, so as to lower my personal tax liability.

My accountant has informed me that because it was "rental real estate", it is considered a 1231 sale, and as such, it is considered "ordinary income" and not a "capital gain", with the important implication of that being that I am not able to use my stock losses as an offset.  In effect, since it is considered ordinary income, it is in another bucket other than capital gains/losses, so not all of the stock losses can be used.  This has the effect of significantly increasing my tax liability.

Any thoughts/comments on this situation, and has anyone experienced this similar issue?  Is there any legal/accounting interpretation/loophole which would allow for that sale to be considered a "capital gain" so that I can utilize my stock losses as an offset?

Any input from the informed BP Nation would be greatly appreciated!