What the half-year convention means
Under the Modified Accelerated Cost Recovery System (MACRS), assets placed in service at any point during the tax year are treated as if they were placed in service at the midpoint of the year. This means you always get a half-year of depreciation in year one — even if you bought the asset on December 31. Similarly, you get a final half-year of depreciation in the year you dispose of the asset.
The half-year convention applies to most personal property (equipment, appliances, furnishings) and short-life assets used in rental property. It does not apply to real property (buildings), which instead uses the mid-month convention — you get a half-month of depreciation for the month the property is placed in service.
When the mid-quarter convention applies instead
There is an important exception. If you place more than 40% of the total depreciable cost of all personal property into service during the fourth quarter of the tax year, the mid-quarter convention applies to all personal property placed in service that year — not just the fourth-quarter assets.
Under the mid-quarter convention, each asset is treated as placed in service at the midpoint of the quarter in which it actually was placed in service. This can significantly reduce year-one depreciation compared to the half-year convention. For example, an asset placed in service in the fourth quarter gets only 1.5 months of depreciation in year one under the mid-quarter rule, instead of 6 months under the half-year rule.
To avoid the mid-quarter convention, be thoughtful about when you buy rental equipment and personal property. Spreading purchases across the year — not front-loading the fourth quarter — keeps you in the more favorable half-year convention.
Real property and the mid-month convention
Residential and commercial buildings use the mid-month convention, which is separate from the personal property rules above. Under this convention, a building placed in service on any day of a given month is treated as placed in service on the 15th of that month — giving you a half-month of depreciation for the placement month.
This is why the year you purchase a rental matters: a December closing gives you about 0.5 months of depreciation for year one, while a January closing gives you 11.5 months. For large buildings, this difference can be $5,000 or more in the first-year deduction. Combined with the placed-in-service date rules, timing your closing can meaningfully accelerate or defer year-one depreciation.
Frequently asked questions
Does the half-year convention apply to rental buildings?
No. Buildings use the mid-month convention, not the half-year convention. The half-year convention applies to personal property (equipment, appliances, furniture).
What triggers the mid-quarter convention?
If more than 40% of the total cost of personal property placed in service during the year was placed in service in the fourth quarter, the mid-quarter convention applies to all personal property placed in service that year.
Can I get a full year of depreciation if I buy an asset January 1?
No. MACRS always applies a convention in year one. Under the half-year convention, you get a half-year regardless of the purchase date.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.