 Most of this information comes from Publication 527, residential rental property, including rental of vacation homes tax year 2022. You can find on the IRS website, irs.gov, irs.gov. Looking at the income tax formula, we're focused on line one income. Remember on the first half of the income tax formula is in essence an income statement, but just to outline other forms and schedules flowing into these line items. One of those, the schedule E in essence and income statement in and of itself with rental income minus rental expenses, the net rental income flowing into line one income of the form 1040 and our income tax equation. We're continuing on with our discussion of depreciation and depreciation is of course a huge topic with rental property because the cost of the rental property is gonna be a huge component. We would like to be able to deduct the cost when we pay for it upfront typically but the tax code doesn't let us do that even if we're using a cash based system. They make us put it on the books as an asset doing an accrual concept thing and then allocating the cost in accordance with the tax code over the useful life and we're continuing our discussions of that process remembering that the tax code is gonna be more restrictive in terms of the categories we've gotta put the property into and then do the calculations in accordance with the categories we're required to put the property into hopefully with the help of software oftentimes we're now continuing on with the conventions. Conventions right. So conventions we talked about makers as like the primary kind of concept or that we're gonna be using in order to depreciate property. It's still using general accounting concepts like straight line versus double declining balance type of concepts and then we have a convention involved and that basically is gonna say can we simplify things somehow instead of saying I bought something or put it in place on February 21st or something and then having to calculate half part of a month a few days of a month we're gonna say can we use some kind of convention assuming we purchased it in the middle of the year middle of the quarter or middle of the month as the case may be. Our convention is a method established under makers to set the beginning and ending of the recovery period. So it's designed to be a little bit easier a little bit easier here on the beginning and ending period without those funny fragments of the year. So the convention you use determines the number of months for which you can claim depreciation in the year you place the property in service and in the year you dispose of the property. Obviously the convention is most seen most times when we put the property in service because that's when we have to do the actual calculation of putting it in place and usually the software is gonna help us to calculate the depreciation going forward but and so we might not have as much focus is what I'm trying to say at the end of the process of depreciation when the useful life ends but obviously if you put it in the in as a half year convention you would think you'd have to end on a half year note as well would be the general idea. So mid month convention. A mid month convention is used for all residential rental property and non residential real property. So if you're used to writing off things like equipment and stuff like that oftentimes they have like a mid month convention we assume I mean I'm sorry mid year convention that means or the middle of the year is gonna be the date we put it in service but when you get to something as large as real estate it would make sense that the convention would change from a mid year to a mid month. So now we don't have to deal with those weird fractions of a month but we still have that half of a month and part of a year that we have to deal with. So under this convention you treat all property placed in service or disposed of during any month as placed in service or disposed of at the mid point of that month the middle point mid quarter convention. So in a mid quarter convention must be used if the mid month convention doesn't apply and the total depreciation basis of maker's property placed in service in the last three months of a tax year excluding non residential real property residential rental property and property placed in service and disposed of in the same year is more than 40% of the total basis of all such property you placed in service during the year. So in other words the mid month convention you usually think of that as what's gonna be used with the big ones the real estate and then we have the mid year convention or half year convention is sometimes called but everything else is mid. So it's kind of easy to say mid year half year convention is kind of the default oftentimes when you think of other types of depreciable property like three year and seven year property but then that leads to an incentive for people to try to buy everything like at the end of the year like in December or something and then take a half year convention half year of depreciation when they bought it at the end of the year and therefore the code says well if you buy a lot of stuff like at the end of the year we're gonna make you use a mid quarter convention so that you only get a quarter instead of a whole half of the year if you buy a bunch of stuff at the end of the year. So under this convention you treat all property placed in service or disposed of during any quarter of a tax year as placed in service or disposed of at the mid point of the quarter. Example, during the tax year Tom purchased the following items to use in his rental property. He elects to claim the special depreciation allowance discussed early he elects not to claim the special. So notice when we're talking about other property we also have these other things that kind of throw a wrench into the mix the 179 and the special depreciation stuff that might allow you to depreciate more stuff kind of upfront but our focus here is on the makers depreciation remembering that makers is the underlying concept of depreciation it will probably continue forward longer than the special depreciation and the 179s which are kind of deviations political kind of things to manipulate the market and or economy. All right so a dishwasher $400 that he placed in service in January then he had used furniture for $100 that he placed in service in September a refrigerator for $800 that he placed in service in October. So Tom uses the calendar year as his tax year the total basis of all property placed in service that year is $1,300. So the $800 basis of the refrigerator placed in service during the last three months last three months last quarter of his tax year exceeds exceeds 520 40% of $1,300. So he's over that threshold so therefore Tom must use the mid quarter convention instead of a half year convention for all three items which is the less advantageous convention generally because you have to only get a quarter possibly of the depreciation as opposed to half of a year three months instead of six months so half year convention the half year convention is used if neither the mid quarter convention nor the mid month convention applies. In other words, the half it's kind of backwards the way they put it in place here because you know, obviously the half month convention would kind of be the default generally unless there was purchases that happened at the end of the quarter that took you from the half year convention and forced you to use the mid month convention. You had to do the test to see whether you had to do the mid quarter convention from the half year default and then the real estate is on the mid month convention because it's the big stuff. Okay, so here we go. So under this convention notice it says half year instead of mid year so you probably hear a lot of people including me call it mid year sometimes because everything else is mid, mid, mid and then we got a half year. So under this convention you treat all property placed in service or disposed of during a tax year as placed in service or disposed of at the midpoint of that tax year. If this convention applies you deduct a half year of the depreciation for the first year and the last year that you depreciate the property. You deduct a full year of depreciation for any other year during the recovery period.