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. No gift tax was paid. In Year 2, Jordan sold the stock for $9,000. What is the amount of gain or loss Jordan must report?

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

Always using the donor's carryover basis.

Answer options:

$1,000 gain

$1,000 loss

No gain or loss

$500 loss

How to approach this question

Dual Basis Rule: If FMV < Donor Basis at gift date, use Donor Basis for Gain, FMV for Loss. If sold in between, no G/L.

Full Answer

C.No gain or loss✓ Correct

Under IRC §1015, when the FMV at the date of gift is less than the donor's basis, a dual basis exists. Basis for gain is the donor's basis ($10,000). Basis for loss is the FMV ($8,000). Since the sale price ($9,000) falls between these two amounts, no gain or loss is recognized.

Common mistakes

Always using the donor's carryover basis.

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