42.16 When MACRS Is Not Allowed

If you place in service personal property that you previously used or that was previously owned by a related taxpayer before 1987, you may not be able to apply MACRS rules. This anti-churning restriction is designed to discourage asset transfers between related persons to take advantage of MACRS deductions that exceed the deductions allowed before 1987 under ACRS. The anti-churning restriction does not apply to personal property if, for the first full taxable year of service, the deduction allowable under ACRS would be greater than the deduction allowable under MACRS.

The anti-churning rule also does not bar MACRS rules for real estate acquired after 1986, unless you lease back the real estate to a related party who owned it before 1987.

Special rules also apply to the transfer of property in certain tax-free corporate or partnership transactions where the property was used before 1987. If you receive property in a tax-free exchange, you may have to use the method used by the transferor in computing the ACRS deduction for that part of basis that does not exceed what was the transferor’s basis in the property. To the extent that basis exceeds the transferor’s, the MACRS rules may apply; for example, when you paid boot in addition to transferring property.

Where property is disposed of and reacquired, the depreciation deduction is computed as if the disposition had not occurred.