Final answer:
The statement is true: Diane's basis for loss after converting her personal residence to rental property is $160,000, the lower of the adjusted basis or the fair market value.
Step-by-step explanation:
The student's question pertains to the basis for loss when converting a personal residence to rental property. The direct answer to the question posed is: A. True. When converting a personal residence into rental property, the basis for loss is the lower of the adjusted basis or the fair market value of the property at the time of conversion. In this scenario, because Diane's home has an adjusted basis of $175,000 and a fair market value of $160,000, the basis for loss upon conversion to rental property would be $160,000.
It is essential to understand that this basis is used for calculating depreciation and for determining gain or loss upon the eventual sale of the property. For tax purposes, the adjusted basis is typically what was paid for the property plus any capital improvements, while the fair market value is what the property would sell for on the open market. When property depreciates in value, as in Diane's case, the basis for loss is set at the fair market value.