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 the above

Question

Quizplus · Accepted Answer

The basis of property for cost recovery is the lower of the property's adjusted basis or fair market value at the time of conversion. In this case, the property's fair market value at the time of conversion is $90,000 and its adjusted basis is $120,000 (the original cost of $120,000 reduced by $50,000 in mortgage debt). Therefore, the basis for cost recovery is $90,000.

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