Author: Robert K Valentine Jr.
In an earlier article, we covered how the mid-month convention works when a building is placed in service — treating the acquisition date as the midpoint of that month, whether the property is 39-year nonresidential (commercial) real property or 27.5-year residential rental property. This article covers the other end of the asset’s life: how much depreciation you’re allowed in the year you sell or otherwise dispose of a building.
The Mid-Month Convention Works the Same Way on the Way Out
Real property depreciated under MACRS — whether it’s a 39-year commercial building or a 27.5-year residential rental property — always uses the straight-line method and the mid-month convention. There’s no half-year or mid-quarter option for real property, and the recovery period itself (39 years vs. 27.5 years) doesn’t change how the disposition-year calculation works — only the convention does, and the convention is identical for both.
Just as the mid-month convention treats a building as placed in service on the 15th of whatever month it was actually acquired, it treats a building as disposed of on the 15th of whatever month it was actually sold — regardless of the actual day of the sale. That means in the year of disposition, you get a half-month of depreciation for the month of sale, plus one full month for every month before it that year:
Disposition-year depreciation = (Depreciable basis ÷ Recovery period) × [(Month of disposition − 0.5) ÷ 12]
where “Month of disposition” is 1 for January through 12 for December. Notice this is the mirror image of the placed-in-service formula from our companion article, which used (12.5 − Month) instead of (Month − 0.5). A building sold in January captures almost nothing for that year — just 0.5 ÷ 12, or about 4.2% of a full year’s depreciation. A building sold in December captures almost the whole year — 11.5 ÷ 12, or about 95.8%.
Example 1: Selling the Office Building (39-Year Commercial Property)
Picking up the office building from our companion article: $1,600,000 of depreciable basis, placed in service June 10, 2026, depreciating at $41,025.64 per full year. Suppose the building is sold on March 8, 2035 — Recovery Year 10.
March is month 3, so the disposition-year fraction is (3 − 0.5) ÷ 12 = 2.5 ÷ 12 = 0.208333 — roughly two and a half months’ worth of depreciation, even though the building was owned for over two months of 2035 before the sale closed:
$41,025.64 × 0.208333 = $8,547.01 depreciation for 2035
| Tax Year | Recovery Year | Calculation | Depreciation Deduction |
|---|---|---|---|
| 2026 | 1 | $41,025.64 × 6.5/12 | $22,222.22 |
| 2027 | 2 | $41,025.64 × 12/12 | $41,025.64 |
| … | … | (same full-year amount) | $41,025.64 |
| 2034 | 9 | $41,025.64 × 12/12 | $41,025.64 |
| 2035 (sold March 8) | 10 | $41,025.64 × 2.5/12 | $8,547.01 |
Total accumulated depreciation from 2026 through the 2035 sale is $358,974.36, leaving $1,241,025.64 of adjusted basis in the building at the time of sale. That adjusted basis — not the original $1,600,000 — is what gets compared to the sale price to figure gain or loss, and any depreciation recapture, on the sale itself.
Example 2: Selling the Apartment Building (27.5-Year Residential Property)
Now the apartment building from the same companion article: $1,100,000 of depreciable basis, placed in service September 20, 2026, depreciating at $40,000.00 per full year. Suppose this building is sold on November 12, 2035 — also Recovery Year 10, but late in the year instead of early.
November is month 11, so the disposition-year fraction is (11 − 0.5) ÷ 12 = 10.5 ÷ 12 = 0.875 — 87.5% of a full year’s depreciation, since the sale happened so late in the year:
$40,000.00 × 0.875 = $35,000.00 depreciation for 2035
| Tax Year | Recovery Year | Calculation | Depreciation Deduction |
|---|---|---|---|
| 2026 | 1 | $40,000.00 × 3.5/12 | $11,666.67 |
| 2027 | 2 | $40,000.00 × 12/12 | $40,000.00 |
| … | … | (same full-year amount) | $40,000.00 |
| 2034 | 9 | $40,000.00 × 12/12 | $40,000.00 |
| 2035 (sold November 12) | 10 | $40,000.00 × 10.5/12 | $35,000.00 |
Total accumulated depreciation from 2026 through the 2035 sale is $366,666.67, leaving $733,333.33 of adjusted basis at the time of sale. Compare the two examples: selling in March captured only about 2.5 months of that final year’s depreciation, while selling in November captured 10.5 months — the mid-month convention rewards a later-in-the-year sale with more depreciation in the year of disposition, exactly the same way it penalizes a late-in-the-year purchase with less depreciation in the first year.
Key Takeaways
- The disposition-year rule is identical for 39-year and 27.5-year property — it’s driven entirely by the mid-month convention, not by which recovery period applies.
- The formula is the mirror image of the placed-in-service formula: (Month of disposition − 0.5) ÷ 12, instead of (12.5 − Month of placement) ÷ 12.
- There’s no half-year or mid-quarter option for real property — unlike the personal property rules covered in our other articles, every real property disposition uses this same month-based mid-month calculation.
- A sale early in the year captures very little depreciation for that final year (as low as about 4.2% of a full year, for a January sale); a sale late in the year captures nearly a full year’s worth (as high as about 95.8%, for a December sale).
- The adjusted basis remaining at the time of sale — original cost minus all depreciation allowed through the disposition year — is what determines gain, loss, and depreciation recapture on the sale, a separate calculation from the depreciation deduction itself.
This article is for general informational purposes only and does not constitute tax or legal advice. It covers the depreciation deduction in the year of disposition only; figuring gain, loss, and depreciation recapture on the sale of real property involves additional rules under Section 1250. Always confirm the land/building allocation and consult a qualified tax professional before applying these rules to your own property.
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