Excepted Property

Even if the requirements explained in the preceding discussions are met, you cannot depreciate the following property.

• Property placed in service and disposed of in the same year. Determining when property is placed in service is explained later.

• Equipment used to build capital improvements. You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. See Uniform Capitalization Rules in Pub. 551.

• Section 197 intangibles. You must amortize these costs. Intangible property, such as certain computer software, that is not section 197 intangible property, can be depreciated if it meets certain requirements. See Intangible Property, later.

• Certain term interests.

Certain term interests in property. You cannot depreciate a term interest in property created or acquired after July 27, 1989, for any period during which the remainder interest is held, directly or indirectly, by a person related to you. A term interest in property means a life interest in property, an interest in property for a term of years, or an income interest in a trust.

Related persons. For a description of related persons, see Related persons , later. For this purpose, how- ever, treat as related persons only the relationships listed in items (1) through (10) of that discussion and substitute “50%” for “10%” each place it appears.

Basis adjustments. If you would be allowed a depreciation deduction for a term interest in property except that the holder of the remainder interest is related to you, you must generally reduce your basis in the term interest by any depreciation or amortization not allowed.

If you hold the remainder interest, you must generally increase your basis in that interest by the depreciation not allowed to the term interest holder. However, do not increase your basis for depreciation not allowed for periods during which either of the following situations applies.

• The term interest is held by an organization exempt from tax.

• The term interest is held by a nonresident alien individual or foreign corporation, and the income from the term interest is not effectively connected with the conduct of a trade or business in the United States.

Exceptions. The above rules do not apply to the holder of a term interest in property acquired by gift,

bequest, or inheritance. They also do not apply to the holder of dividend rights that were separated from any stripped preferred stock if the rights were purchased after April 30, 1993, or to a person whose basis in the stock is determined by reference to the basis in the hands of the purchaser.