Real Estate Tax Calc
What the mid-month convention is
Under MACRS, residential and commercial real estate uses the mid-month convention: the property is treated as placed in service at the midpoint of whatever month you actually placed it in service. Close on December 15 and you get 0.5 months of depreciation in December — roughly 1/24 of the full annual amount.
Effect on year-one deductions
Buying in January gives you 11.5 months of depreciation in year one; buying in December gives only 0.5 months. On a $300,000 building ($250,000 depreciable), the difference between a January purchase ($8,333 first-year) and a December purchase ($362 first-year) is significant. The "lost" depreciation isn't gone — the property's recovery period extends to compensate.
The same convention applies at sale
In the year you sell or dispose of the property, the mid-month convention applies again: you get depreciation for the first half of the month you dispose of the property, then it stops. Keep this in mind when calculating total accumulated depreciation for recapture purposes.
Why the convention exists
The mid-month convention is a simplifying assumption. Rather than track the exact day you placed each building in service and prorate to the day, the IRS assumes every real-property placement happens at the midpoint of its month. It smooths the math and prevents taxpayers from claiming a full month's depreciation for a building placed in service on the last day of the month.
The convention is baked directly into the MACRS percentage tables in IRS Publication 946. You do not usually calculate the half-month by hand — you look up the first-year percentage for the month you placed the property in service and multiply it by your depreciable basis. The tables already reflect the mid-month reduction, which is why the year-one figure is always smaller than a full year's deduction.
The exact first-year percentages
For 27.5-year residential rental property, the MACRS Table A-6 first-year factors, by month placed in service, run from 3.485% (January) down to 0.152% (December). Multiply the factor by your depreciable building basis to get year-one depreciation. On a $275,000 building: a January placement yields $275,000 × 3.485% = $9,584; a July placement yields $275,000 × 1.667% = $4,584; a December placement yields $275,000 × 0.152% = $418.
For 39-year commercial property, Table A-7 applies, with first-year factors from about 2.461% (January) down to 0.107% (December). The pattern is the same: the later in the year you place the property in service, the smaller the first-year deduction — and the correspondingly larger the deduction in the final catch-up year of the schedule.
A month-by-month worked example
Suppose two investors each buy an identical rental with a $250,000 building basis. Investor A closes and lists the property for rent in February; Investor B does the same in November. Investor A's first-year factor is 3.182%, giving $7,955. Investor B's factor is 0.455%, giving $1,138. The difference in year one is nearly $6,800 of deduction.
Crucially, Investor B has not lost that depreciation — it is deferred. Both investors depreciate the same $250,000 over the life of the asset; the schedule simply runs a fraction of a year longer for the later placement, and the missing first-year amount is recovered at the tail end. But in a year where a large deduction is valuable now, timing the placed-in-service date earlier in the year can materially help cash flow.
Mid-month applies only to real property
A common point of confusion: the mid-month convention governs real property only — the 27.5-year residential and 39-year commercial building shells (and 39-year nonresidential improvements). The shorter-life personal property a cost segregation study identifies — 5-year appliances and carpeting, 7-year furniture, 15-year land improvements — uses a different convention entirely: the half-year convention, or the mid-quarter convention if more than 40% of the year's personal-property additions are placed in service in the final quarter.
The half-year convention treats all personal property as placed in service at the midpoint of the year, giving a half-year of depreciation regardless of the actual month. So on a single purchase you may apply mid-month to the building and half-year to the appliances — one reason a clean, itemized depreciation schedule matters.
Placed-in-service date drives the whole calculation
Because the convention keys off the month you place the property in service, that date is the single most important input. A property is placed in service when it is ready and available to rent — advertised and habitable — not when a tenant signs or when you close. If you buy in March but the unit needs two months of rehab before it can be rented, the placed-in-service date is May, and the mid-month factor for May applies.
This gives you a modest planning lever near year-end: completing a rehab and genuinely listing a property before December 31 secures a (small) current-year deduction and starts the clock, whereas slipping into January pushes the entire first year of depreciation into the next tax year. Document the date the property became rent-ready — advertising records, the rental listing, and a certificate of occupancy all help support it.
How it affects total accumulated depreciation and recapture
When you eventually sell, depreciation recapture is computed on the total depreciation allowed or allowable over your entire holding period — the sum of every year's deduction, including the reduced first and last years. The mid-month convention does not reduce your total lifetime depreciation; it only shifts the timing. So your recapture exposure at sale is essentially the same whether you bought in January or December, once you have held the property for the full schedule.
The practical takeaway: keep an accurate, cumulative depreciation schedule from the placed-in-service date forward. At sale you will need the running total to compute unrecaptured Section 1250 gain (taxed at up to 25%), and the mid-month-reduced first year is part of that total. The convention affects when you deduct, not whether you ultimately recapture.
Contrast with the half-year and mid-quarter conventions
It helps to see all three MACRS conventions side by side. Mid-month applies to real property (the 27.5- and 39-year building shell): the asset is treated as placed in service at the midpoint of its month. Half-year applies to most personal property: every asset is treated as placed in service at the midpoint of the year, giving exactly six months of depreciation in year one no matter the actual date. Mid-quarter is a backstop that replaces the half-year convention when more than 40% of the year's personal-property additions occur in the fourth quarter.
The mid-quarter test is easy to trip accidentally: if you buy a rental and place most of its appliances and furniture in service in October–December, more than 40% of that year's personal-property basis may fall in Q4, forcing mid-quarter treatment on all of that year's personal property. This generally reduces the year-one deduction on those components, so investors making large late-year equipment purchases sometimes accelerate or defer them to stay on the more favorable half-year convention. The building itself is always mid-month regardless.
A year-end purchase decision
Because the placed-in-service month sets the year-one factor, the calendar can influence a purchase decision near December. Consider an investor deciding whether to close and list a rental on December 20 or wait until January 5. On a $250,000 building, the December placement yields the 0.152% first-year factor (about $380); the January placement yields 3.485% (about $8,713) — but the January deduction belongs to the next tax year.
Neither choice loses depreciation over the life of the asset; the question is purely which tax year gets the deductions and how much lands in the first partial year. An investor who wants a deduction in the current year (perhaps to offset a spike in income) benefits from getting the property genuinely rent-ready before year-end. One who expects higher income next year might prefer the January placement. The key constraint is that the placed-in-service date must be real — the property truly ready and available to rent — not merely a paper date chosen for tax effect.
Frequently asked questions
Why is my first-year rental depreciation so small?
If you purchased late in the year, the mid-month convention gives you only a fraction of a year's deduction. A December purchase yields roughly 0.5 months.
Does the mid-month convention apply to appliances too?
No — personal property uses the half-year or mid-quarter convention, not the mid-month convention. Only real estate uses mid-month.
How do I find my exact first-year depreciation?
Look up the MACRS first-year percentage for your placed-in-service month in IRS Publication 946 (Table A-6 for 27.5-year residential, Table A-7 for 39-year commercial) and multiply it by your depreciable building basis. The tables already build in the mid-month reduction.
Does the mid-month convention reduce my total depreciation?
No. It only shifts the timing. A late-year placement gives a smaller first-year deduction, but the recovery period extends so you still deduct the full building basis over the life of the asset — the missing amount comes back in the final year.
Can I time my purchase to maximize the first-year deduction?
To a degree. Because the placed-in-service month sets the first-year factor, making a property genuinely rent-ready earlier in the year yields a larger current-year deduction. But the date must be real — ready and available to rent — not backdated.
What is the mid-quarter convention and when does it apply?
It's a variation of the half-year convention for personal property. If more than 40% of the year's personal-property additions (appliances, furniture, and other short-life assets) are placed in service in the fourth quarter, all of that year's personal property switches to the mid-quarter convention, generally reducing the year-one deduction. The building shell always stays on mid-month regardless.
Does the mid-month convention apply to commercial property too?
Yes. Both 27.5-year residential rental and 39-year commercial real property use the mid-month convention; only the recovery period (and thus the table factors) differ. Commercial property uses Publication 946 Table A-7 instead of A-6.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.