26 CFR §1.168(h)-1

1. (a)Scope.
   1. (1)This section applies with respect to a direct or indirect transfer of property among related persons, including transfers made through a qualified intermediary (as defined in § 1.1031(k)-1(g)(4)) or other unrelated person, (a transfer) if—
      1. (i)Section 1031 applies to any party to the transfer or to any related transaction; and
      2. (ii)A principal purpose of the transfer or any related transaction is to avoid or limit the application of the alternative depreciation system (within the meaning of section 168(g)).
   2. (2)For purposes of this section, a person is related to another person if they bear a relationship specified in section 267(b) or section 707(b)(1).
2. (b)Allowable depreciation deduction for property subject to this section
   1. (1)In general. Property (tainted property) transferred directly or indirectly to a taxpayer by a related person (related party) as part of, or in connection with, a transaction in which the related party receives tax-exempt use property (related tax-exempt use property) will, if the tainted property is subject to an allowance for depreciation, be treated in the same manner as the related tax-exempt use property for purposes of determining the allowable depreciation deduction under section 167(a). Under this paragraph (b), the tainted property is depreciated by the taxpayer over the remaining recovery period of, and using the same depreciation method and convention as that of, the related tax-exempt use property.
   2. (2)Limitations
      1. (i)Taxpayer's basis in related tax-exempt use property. The rules of this paragraph (b) apply only with respect to so much of the taxpayer's basis in the tainted property as does not exceed the taxpayer's adjusted basis in the related tax-exempt use property prior to the transfer. Any excess of the taxpayer's basis in the tainted property over its adjusted basis in the related tax-exempt use property prior to the transfer is treated as property to which this section does not apply. This paragraph (b)(2)(i) does not apply if the related tax-exempt use property is not acquired from the taxpayer (e.g., if the taxpayer acquires the tainted property for cash but section 1031 nevertheless applies to the related party because the transfer involves a qualified intermediary).
      2. (ii)Application of section 168(i)(7). This section does not apply to so much of the taxpayer's basis in the tainted property as is subject to section 168(i)(7).
3. (c)Related tax-exempt use property.
   1. (1)For purposes of paragraph (b) of this section, related tax-exempt use property includes—
      1. (i)Property that is tax-exempt use property (as defined in section 168(h)) at the time of the transfer; and
      2. (ii)Property that does not become tax-exempt use property until after the transfer if, at the time of the transfer, it was intended that the property become tax-exempt use property.
   2. (2)For purposes of determining the remaining recovery period of the related tax-exempt use property in the circumstances described in paragraph (c)(1)(ii) of this section, the related tax-exempt use property will be treated as having, prior to the transfer, a lease term equal to the term of any lease that causes such property to become tax-exempt use property.
4. (d)Examples. The following examples illustrate the application of this section. The examples do not address common law doctrines or other authorities that may apply to recharacterize or alter the effects of the transactions described therein. Unless otherwise indicated, parties to the transactions are not related to one another.
5. (e)Effective date. This section applies to transfers made on or after April 20, 1995.