Final answer:
Todd's basis for MACRS cost recovery is the fair market value of $376,000, as it is lower than his adjusted basis at the time he converted his house into a rental property.
Step-by-step explanation:
The basis for MACRS cost recovery on a rental property is the lower of the property's adjusted basis or its fair market value at the time of conversion from personal use to rental property. In Todd's situation, the house has a fair market value of $376,000, which is lower than his adjusted basis of $400,000. Therefore, according to the Internal Revenue Service (IRS) regulations, the correct basis for depreciation would be the fair market value. The basis for purposes of MACRS cost recovery is the lower of the property's basis or its fair market value at the time of conversion. In this case, Todd's basis in the house is $400,000, but its fair market value on the date of conversion is $376,000. Therefore, Todd's basis for MACRS cost recovery purposes is $376,000.
Following these regulations, the correct depreciable basis is $376,000, making answer (b) $376,000 the direct answer to this question. This basis is used to calculate depreciation deductions for the property under the Modified Accelerated Cost Recovery System (MACRS).