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.
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.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.