Mid-Month Convention: Depreciation Rules, Calculations, and Alternatives

The mid-month convention in depreciation is a MACRS timing rule that treats real property placed in service during a given month as if it entered service exactly at the midpoint of that month. You get a half-month of depreciation for the month of placement, a half-month for the month of disposal, and a full 12 months for every year in between. It applies only to real property with long recovery periods, so the month you close on a building shapes every annual deduction that follows.

Which Property Uses the Mid-Month Convention

Three categories of MACRS property must use the mid-month convention: residential rental property (27.5-year recovery period), nonresidential real property (39-year recovery period), and railroad grading or tunnel bores. All three also use the straight-line method, which spreads the cost evenly across the recovery period.¹

No other MACRS property class uses it. Equipment, vehicles, furniture, and other personal property follow the half-year or mid-quarter convention. A building qualifies as residential rental when 80 percent or more of its gross rental income for the year comes from dwelling units; otherwise it is nonresidential and takes the longer 39-year life.¹

Qualified improvement property (QIP), meaning interior improvements to a nonresidential building placed in service after the building itself, is 15-year property but still carries the mid-month convention and straight-line method because it is an improvement to nonresidential real property.² In practice, many taxpayers never run the mid-month math on QIP because 100 percent bonus depreciation, restored by the One Big Beautiful Bill Act for property placed in service after January 19, 2025, lets them expense the whole cost in year one.³

Taxpayers on the Alternative Depreciation System still use the mid-month convention. Under ADS, residential rental stretches to 30 years and nonresidential real property to 40 years, but the convention rules carry over.¹

How to Calculate First-Year Depreciation

The mid-month convention affects only the first year and the last year of the asset’s life. Start by calculating a full year of straight-line depreciation. For 39-year nonresidential property, that is roughly 2.564 percent of the depreciable basis. For 27.5-year residential rental, it is roughly 3.636 percent. Then prorate for the number of months in service, counting a half-month for the month of placement.

Place a commercial building in service in March and you have 9 full months of service from April through December, plus a half-month for March. That is 9.5 months, or a proration factor of 9.5/12 (about 79.17 percent) applied to the full-year amount.²

The swing from January to December is dramatic. January placement gives a factor of 11.5/12 (about 95.83 percent); December placement gives 0.5/12 (about 4.17 percent).⁴ On a $1 million nonresidential building, that is the difference between roughly a $24,570 first-year deduction and about $1,070. Closing in late November versus early January can shift tens of thousands of dollars of write-off.

Using the IRS Percentage Tables

You don’t need to run the math by hand. IRS Publication 946 includes percentage tables with the mid-month proration already built in. Table A-6 covers nonresidential real property; Table A-7a covers residential rental.² Find the row for the month placed in service, the column for the current recovery year, and multiply that percentage by the depreciable basis. The result goes on Form 4562 and flows to your return.⁵

Disposal-Year Depreciation

When you sell, retire, or otherwise dispose of the property, the same half-month rule runs in reverse. The property is treated as disposed of at the midpoint of the disposition month. Sell a building in July and you get 6 full months (January through June) plus a half-month for July, for 6.5 months total. The proration factor is 6.5/12, or about 54.17 percent of the full-year amount.²

Publication 946 works through an example. A residential rental property is bought in July 2023 for $100,000 (excluding land) and sold on March 2, 2025. The full-year 2025 depreciation would be $3,636. Applying the convention for 2.5 months of use (January, February, and half of March), the final-year deduction is $3,636 × 2.5/12 = $757.50.²

Short Tax Years

If your tax year is shorter than 12 months, which comes up with new businesses, fiscal-year changes, or S corporation conversions, you cannot use the standard percentage tables. Calculate a full hypothetical 12-month year first, then multiply by a fraction: the number of months (including the partial month under the mid-month convention) the property was in service during the short year, divided by 12.²

The mid-month rule itself does not change. You still treat the property as placed in service at the midpoint of its placement month. Place a building in service in October during a short year that runs October through December, and the numerator is 2.5 months.

How It Compares to the Half-Year and Mid-Quarter Conventions

Two other MACRS conventions exist, and neither applies to real property. The half-year convention is the default for personal property such as office furniture, equipment, and vehicles. It treats every asset placed in service during the year as if it started at mid-year, giving exactly six months of first-year depreciation regardless of actual purchase date.²

The mid-quarter convention overrides the half-year convention when more than 40 percent of the total depreciable basis of all personal property placed in service during the year falls in the last three months. When triggered, every personal property asset placed in service that year uses the mid-quarter convention, with each one treated as placed in service at the midpoint of its acquisition quarter.² Real property is excluded from the 40 percent test entirely.⁶ Even if you buy a building in December that would push personal property over the 40 percent threshold, the building itself still uses the mid-month convention.

Ways to Accelerate or Bypass Mid-Month Depreciation

Straight-line depreciation over 27.5 or 39 years produces modest annual deductions. Several provisions let you accelerate or sidestep them for parts of a building.

Bonus Depreciation

The One Big Beautiful Bill Act restored 100 percent bonus depreciation for qualifying property placed in service after January 19, 2025.³ Bonus depreciation applies to property with a recovery period of 20 years or less, which includes QIP (15-year) and land improvements like fences, sidewalks, and parking lots (also 15-year).² When you expense 100 percent of the cost in year one, the mid-month convention becomes irrelevant for those components. The building shell itself does not qualify and continues under mid-month straight-line.

Section 179 Expensing

Section 179 lets you deduct the full cost of certain property in the year placed in service. For real property, the election is available for improvements to nonresidential buildings, including roofs, HVAC systems, fire protection, security systems, and qualified improvement property. The annual deduction limit is adjusted for inflation. Residential rental property improvements generally do not qualify.

Cost Segregation Studies

A cost segregation study is an engineering analysis that breaks a building into components and reclassifies items that don’t need to be depreciated over 27.5 or 39 years. Decorative finishes, specialized electrical wiring, exterior paving, and similar items can often be reclassified as 5-, 7-, or 15-year property. Those reclassified components then become eligible for bonus depreciation. A well-executed study can pull 20 to 40 percent of a building’s cost out of the long-life real property class entirely.

Studies typically cost several thousand dollars for straightforward properties and more for complex facilities. The math usually favors properties with at least $500,000 or so in depreciable basis, though smaller properties can benefit when the reclassifiable percentage is high.

Fixing a Wrong-Convention Error

Applying the wrong convention, such as using the half-year convention on a building, is treated as an impermissible depreciation method. You correct it by filing Form 3115 (Application for Change in Accounting Method) under Designated Change Number 7, which covers changes from an impermissible to a permissible depreciation method.⁷ This qualifies as an automatic method change, so IRS approval is not required.

The correction produces a Section 481(a) adjustment, which is the cumulative difference between what you actually deducted and what you should have deducted for all prior years. If you under-deducted, the adjustment is negative and you take the entire catch-up amount in the year of change. Amended returns for prior years are not needed; the single adjustment makes you whole without reopening closed tax years.

1
Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System
2
Internal Revenue Service. Publication 946 (2025), How To Depreciate Property
3
Internal Revenue Service. One, Big, Beautiful Bill Provisions
4
Internal Revenue Service. 2025 Instructions for Form 4562 – Depreciation and Amortization
5
Internal Revenue Service. About Form 4562, Depreciation and Amortization
6
eCFR. 26 CFR 1.168(d)-1 – Applicable Conventions, Half-Year and Mid-Quarter Conventions
7
Internal Revenue Service. Instructions for Form 3115