On June 1 of the current year, Tab converted a machine from personal use to rental property.At the time of the conversion, the machine was worth $90,000.Five years ago, Tab purchased the machine for $120,000.The machine is still encumbered by a $50,000 mortgage.What is the basis of the machine for cost recovery?
A)$70,000
B)$90,000
C)$120,000
D)$140,000
E)None of these.

Question

Quizplus · Accepted Answer

The basis for cost recovery of a property converted from personal use to rental use is the lower of the property's adjusted basis at the time of conversion or its fair market value. Since the machine was purchased for $120,000 (its adjusted basis) and had a fair market value of $90,000 at the time of conversion, the basis for cost recovery is $90,000, the lower of the two values. The mortgage does not affect the basis for cost recovery.

On June 1 of the Current Year, Tab Converted a Machine