Understanding the Mid-Month Convention: How It Affects Your Depreciation Deductions

Depreciation is one of the smartest ways property owners can save on taxes. Think of it as a tax break that lets you spread out the cost of your property over time, keeping more money in your pocket and boosting your cash flow. But it’s not a free-for-all. Tax rules decide when and how you can claim the deductions.

One rule you need to know is the mid-month convention. It might sound technical, but it’s a simple concept that shapes how depreciation works for certain properties. If you own rental homes, commercial buildings, or any other depreciable assets in the U.S., understanding this rule can make a big difference in your tax strategy.

What is the Mid-Month Convention?

The mid-month convention is a tax rule that sets when you can start claiming depreciation on real estate. Instead of using the actual date you bought or sold a property, the IRS assumes everything happens halfway through the month.

Let’s say you buy a rental property on November 3. You might think depreciation kicks off right away, but nope. The IRS treats it as if you started using the property on November 15. This rule mainly applies to residential and commercial real estate because they follow the MACRS system, which spreads out depreciation over 27.5 years for residential properties and 39 years for commercial ones.

Why Does the Mid-Month Convention Matter?

1. Reduces First-Year Deductions:
   The mid-month convention lowers the depreciation you can claim in the first year since it assumes the property was in service for only half the month. For example, if your rental property’s annual depreciation is $10,000, you’ll be able to deduct around $416 for November instead of the full $833 for a whole month.
2. Affects the Year of Sale:
   When you sell or dispose of a property, the same rule applies. Depreciation is calculated up to the middle of the month you sell even if you close the deal earlier or later.
3. Makes Timing Consistent:
   The mid-month convention simplifies tax calculations by using the same rule for all property owners. Although it limits some flexibility, it makes sure the IRS treats depreciation the same for everyone.

How the Mid-Month Convention Interacts with Cost Segregation

A cost segregation study allows landlords and property owners to accelerate depreciation by reclassifying certain components of a building—for example, flooring, HVAC systems, or landscaping—into shorter recovery periods (5, 7, or 15 years).

However, the mid-month convention still applies to the core building structure. For example, if you buy a residential property in November and conduct a cost segregation study, assets assigned to 5- or 15-year categories will follow standard rules (half-year or mid-quarter conventions), while the 27.5-year portion remains subject to the mid-month convention.

This is important for landlords who want to maximize their first-year deductions. A cost segregation study can help you get bigger tax savings upfront even if the mid-month convention reduces deductions for the main building.

Practical Example

Let’s break this down with numbers.

• You purchase a residential rental property for $300,000 on November 5.
• $240,000 is allocated to the building, with $60,000 assigned to land (non-depreciable).
• Using straight-line depreciation over 27.5 years, the annual depreciation for the building is $8,727.

First-Year Depreciation (Mid-Month Convention):

• November: $8,727 ÷ 12 × 0.5 = $364
• December: $8,727 ÷ 12 = $727

Your total depreciation deduction for 2024 is $1,091, much lower than a full year’s deduction because of the mid-month rule.

Tax Planning Strategies

• Time Your Purchases and Sales Right:

Closing on a property late in the year can cut down on your deductions for that tax year. If you can, try to close earlier in the month—or even earlier in the year—to get the full benefit of first-year depreciation.

• Use Cost Segregation to Your Advantage:

While the mid-month convention applies to the main building, a cost segregation study can help you find parts of the property that qualify for faster depreciation. This can help balance out the lower first-year deduction.

• Work with Your Tax Advisor: 

The mid-month rule is just one part of the bigger picture. A tax advisor can help you use it in the context of a larger tax strategy, making sure you take advantage of every deduction you’re eligible for.

Common Misconceptions

“I can’t claim depreciation if I close late in the year.”
False. Even if you purchase a property in December, you’re entitled to a partial deduction for that year, calculated under the mid-month convention.

“The mid-month convention applies to all assets.”
Incorrect. It primarily affects real property (residential and commercial). Personal property like appliances, furniture and fixtures follows different rules.

Conclusion

The mid-month convention may seem like a small detail, but it greatly impacts your depreciation deductions. Although it can reduce first-year tax benefits, understanding how it works lets you better time your purchases, plan your property sales and use cost segregation to boost your savings.

For property owners, it’s often the little things that make the biggest difference.