That's true, but what which "gain/" When I sell shares in a partnership the "gain" on the sale consists of two parts: one from past depreciation (which reduced my cost basis) and another from what remains, which is characterized as a capital gain or loss.
Maybe I'm overthinking this. If I have a net gain on the sale, even if it is due to the "ordinary gain" exceeding a capital loss on the sale, the net gain appears to satisfy the language defining a wash sale.
Unfortunately, that does not totally resolve the issue. Suppose the capital loss exceeds the ordinary gain? Then I clearly have a net loss and a wash sale. The next issue is how do I allocate the disallowed loss? When the replacement shares are sold they will have a cost basis consisting of four components: (1) original purchase price (2) an ordinary gain due to past depreciation, (3) a capital gain (or loss) and the net loss disallowed by the wash sale, which itself will consist of two components (ordinary gain and a capital gain or loss.
My question is do I add together the ordinary gain components and also add together the capital gains and losses but keep these two sums separate so that the former is entered on Form 4797 and the latter is entered on Schedule D? This sounds logical because all of the recaptured depreciation is taxed at the 25 percent rate. However, it require detailed record keeping.
The alternative is to just add the entire disallowed net loss to the original purchase price and lose the information regarding the recaptured depreciation. I would think the IRS would oppose this as it allows that recaptured depreciation to be taxed potentially at the lower long-term cap gains rate.
Again, maybe I'm overthinking this. But surely someone at the IRS has thought of this before me.
