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

b
RATIONALE: The basis is $90,000, the lower of the adjusted basis ($120,000) or fair market value ($90,000) at the date of conversion. The mortgage of $50,000 does not affect adjusted basis.