Because rental property depreciation (cost recovery) forms the basis for a major part of tax shelter, those investing money in real estate are undoubtedly familiar with the term and its benefits, yet may not understand how mid-month convention is applied to determine depreciation allowance.

According to the current tax code, those who purchase income property can take a depreciation deduction on the real property (the improvements, not the land) according to its useful life as prescribed by the tax code starting from the month the asset is placed into service (usually when you take title) for use in a trade or business or for income production until whatever month the asset is disposed of. The code incorporates what is called a mid-month convention to whatever month you place the asset into service and whatever month you dispose of it.

The idea is straightforward. Rather than use the actual day of the month to begin or end the depreciation deduction allowance, the IRS simply assumes that the property is placed in service in the middle of the month it was acquired and sold in mid-month in which it is sold. In other words, you’re entitled to one-half month’s depreciation in the month the income property was placed into service (regardless of the actual number of days in service that first calendar month), and one-half month’s depreciation in the month of disposition (regardless of the actual date of disposition).

It should be noted that ProAPOD real estate investment software applies the mid-month convention to reports likes its Proforma Income Statement when it calculates depreciation.

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