diff --git a/build-common/src/org/jetbrains/kotlin/incremental/IncrementalModuleInfo.kt b/build-common/src/org/jetbrains/kotlin/incremental/IncrementalModuleInfo.kt
index a49ec4eb04a..30ee30d35e1 100644
--- a/build-common/src/org/jetbrains/kotlin/incremental/IncrementalModuleInfo.kt
+++ b/build-common/src/org/jetbrains/kotlin/incremental/IncrementalModuleInfo.kt
@@ -21,6 +21,7 @@ data class IncrementalModuleEntry(
 
 class IncrementalModuleInfo(
     val projectRoot: File,
+    val rootProjectBuildDir: File,
     val dirToModule: Map<File, IncrementalModuleEntry>,
     val nameToModules: Map<String, Set<IncrementalModuleEntry>>,
     val jarToClassListFile: Map<File, File>,
@@ -28,6 +29,6 @@ class IncrementalModuleInfo(
     val jarToModule: Map<File, IncrementalModuleEntry>
 ) : Serializable {
     companion object {
-        private const val serialVersionUID = 0L
+        private const val serialVersionUID = 1L
     }
 }
\ No newline at end of file
diff --git a/compiler/incremental-compilation-impl/src/org/jetbrains/kotlin/incremental/multiproject/ModulesApiHistory.kt b/compiler/incremental-compilation-impl/src/org/jetbrains/kotlin/incremental/multiproject/ModulesApiHistory.kt
index 8951733c126..ce7ac983cad 100644
--- a/compiler/incremental-compilation-impl/src/org/jetbrains/kotlin/incremental/multiproject/ModulesApiHistory.kt
+++ b/compiler/incremental-compilation-impl/src/org/jetbrains/kotlin/incremental/multiproject/ModulesApiHistory.kt
@@ -5,7 +5,6 @@
 
 package org.jetbrains.kotlin.incremental.multiproject
 
-import org.jetbrains.kotlin.incremental.IncrementalModuleEntry
 import org.jetbrains.kotlin.incremental.IncrementalModuleInfo
 import org.jetbrains.kotlin.incremental.util.Either
 import java.io.File
@@ -23,7 +22,14 @@ object EmptyModulesApiHistory : ModulesApiHistory {
 }
 
 abstract class ModulesApiHistoryBase(protected val modulesInfo: IncrementalModuleInfo) : ModulesApiHistory {
-    protected val projectRootPath: Path = Paths.get(modulesInfo.projectRoot.absolutePath)
+    // All project build dirs should have this dir as their parent. For a default project setup, this will
+    // be the same as root project path. Some projects map output outside of the root project dir, typically
+    // with <some_dir>/<project_path>/build, and in that case, this path will be <some_dir>.
+    // This is using set in order to de-dup paths, and avoid duplicate checks when possible.
+    protected val possibleParentsToBuildDirs: Set<Path> = setOf(
+        Paths.get(modulesInfo.rootProjectBuildDir.parentFile.absolutePath),
+        Paths.get(modulesInfo.projectRoot.absolutePath)
+    )
     private val dirToHistoryFileCache = HashMap<File, Set<File>>()
 
     override fun historyFilesForChangedFiles(changedFiles: Set<File>): Either<Set<File>> {
@@ -76,7 +82,7 @@ abstract class ModulesApiHistoryBase(protected val modulesInfo: IncrementalModul
             when {
                 module != null ->
                     setOf(module.buildHistoryFile)
-                parent != null && projectRootPath.isParentOf(parent) -> {
+                parent != null && isInProjectBuildDir(parent) -> {
                     val parentHistory = getBuildHistoryForDir(parent)
                     when (parentHistory) {
                         is Either.Success<Set<File>> -> parentHistory.value
@@ -90,6 +96,10 @@ abstract class ModulesApiHistoryBase(protected val modulesInfo: IncrementalModul
         return Either.Success(history)
     }
 
+    protected fun isInProjectBuildDir(file: File): Boolean {
+        return possibleParentsToBuildDirs.any { it.isParentOf(file) }
+    }
+
     protected abstract fun getBuildHistoryFilesForJar(jar: File): Either<Set<File>>
 }
 
@@ -145,14 +155,14 @@ class ModulesApiHistoryAndroid(modulesInfo: IncrementalModuleInfo) : ModulesApiH
 
     override fun getBuildHistoryFilesForJar(jar: File): Either<Set<File>> {
         // Module detection is expensive, so we don't don it for jars outside of project dir
-        if (!projectRootPath.isParentOf(jar)) return Either.Error("Non-project jar is modified $jar")
+        if (!isInProjectBuildDir(jar)) return Either.Error("Non-project jar is modified $jar")
 
         val jarPath = Paths.get(jar.absolutePath)
         return getHistoryForModuleNames(jarPath, getPossibleModuleNamesFromJar(jarPath))
     }
 
     override fun getBuildHistoryForDir(file: File): Either<Set<File>> {
-        if (!projectRootPath.isParentOf(file)) return Either.Error("Non-project file while looking for history $file")
+        if (!isInProjectBuildDir(file)) return Either.Error("Non-project file while looking for history $file")
 
         // check both meta-inf and META-INF directories
         val moduleNames =
diff --git a/compiler/incremental-compilation-impl/test/org/jetbrains/kotlin/incremental/AbstractIncrementaMultiModulelCompilerRunnerTest.kt b/compiler/incremental-compilation-impl/test/org/jetbrains/kotlin/incremental/AbstractIncrementaMultiModulelCompilerRunnerTest.kt
index c46bee28e71..2c25c1f3612 100644
--- a/compiler/incremental-compilation-impl/test/org/jetbrains/kotlin/incremental/AbstractIncrementaMultiModulelCompilerRunnerTest.kt
+++ b/compiler/incremental-compilation-impl/test/org/jetbrains/kotlin/incremental/AbstractIncrementaMultiModulelCompilerRunnerTest.kt
@@ -32,7 +32,7 @@ abstract class AbstractIncrementalMultiModuleCompilerRunnerTest<Args : CommonCom
     private val jarToModule = mutableMapOf<File, IncrementalModuleEntry>()
 
     protected val incrementalModuleInfo: IncrementalModuleInfo by lazy {
-        IncrementalModuleInfo(workingDir, dirToModule, nameToModules, jarToClassListFile, jarToModule)
+        IncrementalModuleInfo(workingDir, workingDir, dirToModule, nameToModules, jarToClassListFile, jarToModule)
     }
 
     protected abstract val modulesApiHistory: ApiHistory
diff --git a/compiler/incremental-compilation-impl/test/org/jetbrains/kotlin/incremental/multiproject/ModulesApiHistoryAndroidTest.kt b/compiler/incremental-compilation-impl/test/org/jetbrains/kotlin/incremental/multiproject/ModulesApiHistoryAndroidTest.kt
index bb3ec09aacc..c783c7de358 100644
--- a/compiler/incremental-compilation-impl/test/org/jetbrains/kotlin/incremental/multiproject/ModulesApiHistoryAndroidTest.kt
+++ b/compiler/incremental-compilation-impl/test/org/jetbrains/kotlin/incremental/multiproject/ModulesApiHistoryAndroidTest.kt
@@ -56,6 +56,7 @@ class ModulesApiHistoryAndroidTest {
 
         val info = IncrementalModuleInfo(
             projectRoot = projectRoot,
+            rootProjectBuildDir = projectRoot.resolve("build"),
             dirToModule = mapOf(appKotlinDestination to appEntry, libKotlinDestination to libEntry),
             nameToModules = mapOf("app" to setOf(appEntry), "lib" to setOf(libEntry)),
             jarToClassListFile = mapOf(),
diff --git a/libraries/tools/kotlin-gradle-plugin-integration-tests/src/test/kotlin/org/jetbrains/kotlin/gradle/IncrementalCompilationMultiProjectIT.kt b/libraries/tools/kotlin-gradle-plugin-integration-tests/src/test/kotlin/org/jetbrains/kotlin/gradle/IncrementalCompilationMultiProjectIT.kt
index e14da624cf5..65be9b10dac 100644
--- a/libraries/tools/kotlin-gradle-plugin-integration-tests/src/test/kotlin/org/jetbrains/kotlin/gradle/IncrementalCompilationMultiProjectIT.kt
+++ b/libraries/tools/kotlin-gradle-plugin-integration-tests/src/test/kotlin/org/jetbrains/kotlin/gradle/IncrementalCompilationMultiProjectIT.kt
@@ -347,5 +347,33 @@ open class A {
             assertCompiledKotlinSources(project.relativize(aaKt))
         }
     }
+
+    /** Regression test for KT-40875. */
+    @Test
+    fun testMoveFunctionFromLibWithRemappedBuildDirs() {
+        val project = defaultProject()
+        project.setupWorkingDir()
+        project.projectDir.resolve("build.gradle").appendText("""
+
+            allprojects {
+                it.buildDir = new File(rootDir,  "../out" + it.path.replace(":", "/") + "/build")
+            }
+        """.trimIndent())
+        project.build("build") {
+            assertSuccessful()
+        }
+
+        val barUseABKt = project.projectDir.getFileByName("barUseAB.kt")
+        val barInApp = File(project.projectDir, "app/src/main/kotlin/bar").apply { mkdirs() }
+        barUseABKt.copyTo(File(barInApp, barUseABKt.name))
+        barUseABKt.delete()
+
+        project.build("build") {
+            assertSuccessful()
+            val affectedSources = project.projectDir.getFilesByNames("fooCallUseAB.kt", "barUseAB.kt")
+            val relativePaths = project.relativize(affectedSources)
+            assertCompiledKotlinSources(relativePaths)
+        }
+    }
 }
 
diff --git a/libraries/tools/kotlin-gradle-plugin/src/main/kotlin/org/jetbrains/kotlin/compilerRunner/GradleKotlinCompilerRunner.kt b/libraries/tools/kotlin-gradle-plugin/src/main/kotlin/org/jetbrains/kotlin/compilerRunner/GradleKotlinCompilerRunner.kt
index 5bbb9eacf11..fb4fc14b5a2 100644
--- a/libraries/tools/kotlin-gradle-plugin/src/main/kotlin/org/jetbrains/kotlin/compilerRunner/GradleKotlinCompilerRunner.kt
+++ b/libraries/tools/kotlin-gradle-plugin/src/main/kotlin/org/jetbrains/kotlin/compilerRunner/GradleKotlinCompilerRunner.kt
@@ -257,6 +257,7 @@ internal open class GradleCompilerRunner(protected val taskProvider: GradleCompi
 
             return IncrementalModuleInfo(
                 projectRoot = gradle.rootProject.projectDir,
+                rootProjectBuildDir = gradle.rootProject.buildDir,
                 dirToModule = dirToModule,
                 nameToModules = nameToModules,
                 jarToClassListFile = jarToClassListFile,