The bullnose tile along the corner is just about flush with the drywall towards the floor but goes about a 1/2 inch past the drywall going up toward the ceiling. I'm looking for the best way to fix this.
Tile – My shower tile goes past the drywall on an outside corner
tile
Related Solutions
It looks like all that is seperating the drywall from the tile is a bead of caulking. To fix this, I would first remove all of the existing caulking. Then I would cut out the area of the affected drywall and patch in a new piece, using the factory taped edge as the end that butts up against the tile. Tape, mud and sand the new section and paint to match. Once finished, install a new bead of caulking along the entire length and it should look like new!
Joe, sorry to use the "answer" function again instead of adding another comment, I wanted to attach more pictures.
The tile I used was not available with a bullnose so I finished it flat on the sidewall. The edge cant be seen normally so I did not spend time making it perfect, but for your situation I retract my note about never finishing an edge with caulking. If you end flat to the wall around that corner it would be perfectly fine to use caulking for aesthetic purposes, use paintable caulk so you can paint a straight line down the whole side when you paint the wall.
Sorry I misunderstood your question, my situation was similar to yours and wrapping the tile around to the outside seemed like the best solution for me, and it looks pretty good that way (at least my wife did not complain, that's all that really matters). 
Related Topic
- Drywall – Tape or corner bead where Hardi meets Drywall
- Tile – How to install glass mosaic tile around an outside rounded corner
- Drywall – Newly framed bathroom wall not square, how bad will the tile look
- Shower – Leaking tile shower at corner near glass door
- Tile – How to adhere edge of bullnose tile to drywall as trim for shower/tub surround
Best Answer
Say hello to joint compound (aka mud); it covers a multitude of sins. Mud it up until it's even with the tile. Start with hot (dry powder, mix with water, sets) mud.