In Year 1, Jordan received a gift of stock from a parent. The parent's adjusted basis was $10,000, and the fair market value (FMV) at the date of the gift was $8,000. Jordan sold the stock in Year 2 for $9,000. What is the amount of gain or loss Jordan must report for Year 2?

Q: What mistakes do candidates make on this CPA question?

Using the donor's basis for everything.

Answer options:

$1,000 gain

$1,000 loss

$500 loss

How to approach this question

Apply the Dual Basis rule for loss gifts. Gain Basis = Donor's ($10k). Loss Basis = FMV ($8k). If Sale Price is between them, no gain/loss.

Full Answer

D.$0✓ Correct

Under IRC §1015, if FMV < Donor's Basis at the date of gift, there is a dual basis. Gain basis = $10,000. Loss basis = $8,000. Sale price = $9,000. Gain calculation: $9,000 - $10,000 = Loss (cannot use gain basis). Loss calculation: $9,000 - $8,000 = Gain (cannot use loss basis). Therefore, no gain or loss is recognized.

Common mistakes

Using the donor's basis for everything.

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