Pekoe sold stock to his sister Rose for $12,000, its fair market value. Pekoe bought the stock 5 years ago for $16,000. Also, Pekoe sold Earl (an unrelated party) stock for $6,500 that he bought 3 years ago for $9,500. What is Pekoe's recognized gain or loss?

The answer is $3000

Explanation:

Solution

Given that:

Pekoe sold stock to his sister rose for the amount = $12,000

The stock cost 5 years ago for Pekoe = $16,000

Pekoe sold earl stock for = $6,500

Previous stock for earl 3 years ago = $9,500

Now we have to find the recognized loss of Pekoe

THus,

The sale of stock to rose will be a loss of $ 4000

which is

($12,000 - $16,000) = $4000 loss

Thus,

The sale of stock to Earl will result to the following loss which is state below:

$6,500 - $9,500 = a loss of $3000

Therefore the recognized loss of pekoe is $3000 or - $3000

Note: A loss was recognized here, no gain earned

Pekoe would recognize the loss of $3,000.

Explanation:

The sale of stock to Rose would result in a loss of $3,000 ($12,000 (FMV) - $16,000 (cost) = $4,000 loss).

Under the tax law, "losses from sale or exchange of property ... directly or indirectly" are disallowed between related parties. When the property is later sold to an unrelated party, any disallowed loss may be used to offset gain on that transaction.

The sale of stock to Earl (an unrelated party) also results in a loss ($6,500 (FMV) - $9,500 (cost) = $3,000 loss). This is considered an arms-length transaction.

Pekoe would recognize the loss of $3,000.