You still get depreciation in the sale year
Many investors are surprised to learn that depreciation is available in the year of sale — right up to the month you sell. Under the mid-month convention for real property, you are treated as placing the property in service (or out of service) in the middle of any given month. This means if you sell in September, you get depreciation for January through mid-September — roughly 8.5 months out of 12.
Example: Your annual depreciation on a residential rental is $12,000 ($12,000 ÷ 12 = $1,000/month). If you sell in September, your depreciation deduction for the sale year is $1,000 × 8.5 = $8,500.
How it affects adjusted basis and recapture
The year-of-sale depreciation deduction reduces your adjusted basis by the same amount, which increases both your total gain and the amount of depreciation recapture. This is not double-dipping — it's the correct accounting: the deduction and the lower basis both reflect the same economic reality.
On your Form 4797 and depreciation recapture calculation, make sure to include the partial-year deduction in your total accumulated depreciation figure. Forgetting it understates your recapture and overstates your capital gain, which misallocates the tax between the two rates.
Personal property and mid-quarter convention
Personal property (equipment, appliances, cost-segregated assets) uses the half-year convention — you get half a year's depreciation in the year the asset is placed in service and half in the year of disposal, regardless of the month. If more than 40% of depreciable personal property is placed in service in the fourth quarter, the mid-quarter convention applies instead, changing the calculation by quarter.
For most rental investors, the real property (building) is the dominant asset. Focus on the mid-month convention for the building and use your depreciation schedule for the personal property items.
Frequently asked questions
Do I stop depreciation the month I list the property for sale?
No. Depreciation continues as long as the property is held for rental or investment use. You stop claiming it in the month of sale (using the mid-month convention).
How does year-of-sale depreciation affect my recapture?
It increases your accumulated depreciation by the partial-year amount, which raises the recapture taxed at up to 25%. It also reduces your adjusted basis by the same amount.
What convention applies to appliances and fixtures?
Personal property uses the half-year convention — you get one-half year of depreciation in both the placed-in-service year and the year of disposal.
Sources
- IRS Topic No. 409 — Capital Gains and Losses
- IRS Publication 544 — Sales and Other Dispositions of Assets
- IRS Publication 946 — How to Depreciate Property
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.