Half-Year vs. Mid-Quarter Convention: How Timing Affects Your First-Year Depreciation

When you place property in service, MACRS doesn't let you deduct a full year of depreciation regardless of when in the year the asset was acquired. Instead, the IRS applies a convention that determines how much of a year's depreciation you can claim. For most rental investors, the half-year convention applies — but the mid-quarter convention can significantly reduce your first-year deduction if you're not careful.

The Half-Year Convention

Under the half-year convention, property is treated as placed in service in the middle of the year — regardless of the actual date. For a 5-year asset using 200% declining balance, the calculation gives you one-half of a full year's depreciation deduction in year 1.

Example: a $60,000 5-year personal property asset placed in service at any point in 2025. Under 200% DB: $60,000 × (2/5) × 50% (half-year) = $12,000 in year 1. Without bonus depreciation. With 100% bonus depreciation, the convention doesn't limit the deduction — the full $60,000 is expensed.

The Mid-Quarter Convention: The Trap to Avoid

The mid-quarter convention applies when more than 40% of the total depreciable basis of all personal property placed in service during the year is placed in service during the last three months (fourth quarter) of the year. When this condition is triggered, ALL personal property placed in service during the year is treated as placed in service in the middle of its respective quarter.

The effect on Q4 assets is punishing: property placed in service in Q4 under the mid-quarter convention gets only 1.5 months of depreciation in year 1 (mid-quarter = November 15), instead of the 6 months under the half-year convention. For a large cost segregation study, this can significantly reduce the first-year deduction.

Mid-Quarter + Bonus Depreciation Interaction

The good news: bonus depreciation largely overrides the convention issue. When you elect bonus depreciation on an asset, the convention doesn't limit the deduction to a fraction of the year — you expense 100% regardless. The mid-quarter trap primarily matters for the MACRS regular depreciation portion of assets that don't receive bonus.

Since the OBBBA restored 100% bonus depreciation for all property with a recovery period of 20 years or fewer, the mid-quarter convention has minimal impact on STR investors who apply bonus depreciation to all qualifying assets.

The Mid-Month Convention: Real Property

Building structure (27.5-year and 39-year property) uses the mid-month convention — property is treated as placed in service on the 15th of the month in which it's acquired. So if you close on your rental property on December 20, you get 0.5 months of straight-line depreciation in that first year: approximately $545 on a $450,000 building. This is why year-one building depreciation is always a prorated partial-year figure.