 Before we proceed any further, I have a public announcement about my company farhatlectures.com. Farhat Accounting Lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today. Hello and welcome to this session in which we will discuss the mid-month convention. In the prior session, we discussed the mid-year convention and we also discussed the mid-quarter convention and we stated that those conventions mid-year and mid-month applies to personal property and we differentiate between personal property and real property. In this session, as we are discussing the mid-month convention, the mid-month convention applies to real or realty property. What's real and realty property? Building, warehouses, land, things that are affixed to the land that are not movable. A car will be considered a personal property, by the way. Is there personal use or personal property? But we talked about this in the prior session. Let's take a look at makers' realty or makers' for real property. Again, here we are talking about buildings because we don't depreciate land. That's the reason why we assume building. Now, we're going to break down the real property into two types of real property. We're going to have residential rental. What is residential rental? It's where people live and we have non-residential property. It's considered commercial, think-of, office building. This is what we mean by residential versus non-residential. Here's what's going to happen. We're going to have class life, different class life for each classes of this property. For the residential rental, we're going to have 27 and a half years. For non-residential, we're going to have 39 years. The method of depreciation we're going to be using, it's going to be straight line versus, if you remember, under the others, under the half year and the mid quarter, we use the double declining balance, the 200 or the 150. And we are going to assume a mid month convention, not a mid year, not a mid quarter. For real property, we're going to be using mid month. And again, residential real estate include property where 80 percent of the gross rental income are from non-transient. It means non-transient. I mean, people don't move around non-transient dwelling, which is rental property. People live there. That's what we talk about apartment building. However, hotels, motels, and similar establishment are not residential rental property. What is the mid month convention if a property is put into use at any point in a given month? It's considered to have put on the 15th on that month or disposed of for that matter. For example, a commercial building that's put into use on April 3rd will be treated as it puts into use on April 15. Now, obviously, we have a different schedule for the residential and non-residential. This is the residential rental property. Notice it's 27 and a half years, mid month convention, mid month convention, straight line method. Notice the first year we're going to have a partial depreciation. Therefore, the rate for this is month, January, February, March, April, May. And this is year one, year two to nine, year 10, 11, so on and so forth. Notice here after year one until the last year, basically it's 3.636 or 3.637 rounding. Basically, it's the straight line the same amount every year as long as you have a full year depreciation. However, year one will be prorated because it's a partial year. It's a partial year, but the computation has been done for you. We'll work an example illustrating how to use this. Same concept for non-residential. Again, when I say non-residential, we're talking about commercial property. It's 39 years straight line. Those tables are from the IRS. Notice the first year it's different for each month, January, February, March. Why? Because it's a prorated. Then notice as you go down, it's going to be lower. Then for the remaining from year two to year 39, it's the same amount because we're going to have this asset for the full year. Then the last year, it will be prorated to make up the full year, to make up the full year. If you add those two, they should add up to 2.564. Let's do that just so I will show you. If we take 2.461 plus 0.1, 2.461 plus 0.0107, that's equal to, let's do it again, 2.461 plus 0.107, that's equal to 2.568. Again, this is a rounding issue, but approximately 2.564, 5.677, something like that. This is the non-commercial, non-residential rental property, which is commercial. 39 years mid-month convention and straight line. Notice in year one always it's going to be prorated because year one you're going to take partial year depreciation depending on the month. Then from year two to year 39, you're going to have the same amount because we're using the straight line assuming you don't sell it. Then in year 39.5 or in year 40, you'll have a partial as well. Let's take a look at an example for a residential real estate to illustrate how we use the tables. On April 1st, 2005, John purchased a building for a million, which could qualify as a residential rental real estate. Residential rental real estate means it's subject to the 27.5 years mid-month convention using the straight line. So let's assume we're in the year 2022, or it could be in the year up until the next 26 years. The cost recovery deduction will be how much? Well, we're going to take a million, and the cost recovery deduction is 0.0363, which is from year two to year all the way year 27. It's this rate 3.636%, which is 0.03636. So the total amount is 36,360. If the property is sold on October 5th, the deduction would be different. Why? If it's sold in October, that's the 10th month. If it's the 10th month, so it's right here, the full rate is 0.3636. However, for that year, we can take the majority of the year, which is nine and a half month, because it's assumed it's sold in the middle of the month. So we'll have nine full month plus this middle. So we're going to take the full depreciation multiplied by 9.5 divided by 12. And if my math is right, we will take 28,782, because we had it for a partial year, the majority of the year. But nevertheless, it's a partial year, a little bit over 75%, because this is by itself 75% plus this small part. Let's take a look at an example that illustrates the commercial, which is what we're doing by commercial, 39 and a half, 39 years. A building was purchased by John on November 2nd, 2022 for a million. If the property is classified non-residential, it means commercial, the cost recovery will be how much? Now we're going to be using the stable 39 years straight line mid-month. Well, what is the rate? The rate is 0.3210. Why 0.3210? We purchased this building in November. November is the 11th month. For the 11th month, it's going to be already prorated 0.3210, which is a million times this amount. Let's assume the property was sold on May 5th, 2025, instead of being held for the entire year. How much will be the deduction? Well, so going forward, the rate that's going to be from year 2 to year 39, the full rate is 0.2564%. Now, since we sold it in May, since we sold it in May, so we had this asset a full four month and we assume we sold it mid-May. It doesn't matter when in May. We assume we sold it mid-May. Therefore, we're going to take the full year, multiply by the portion of the year we held this asset, which is 4.5 divided by 12 times a million. If my math is right, again, you can check the math if it's not right. I apologize, but it should be right. It should be 9,615. So this is how we will use the mid-month convention. Now, what should you do now? Go to Farhat Lectures, look at additional MCQs through false notes and additional lectures that's going to help you understand the cost recovery method. Again, under cost recovery, we learn about half year convention, mid-quarter convention, half year and mid-quarter apply to what? Applies to personal property. Mid-month convention, we just covered, applies to real property. Good luck, study hard whether you're a CPA candidate, enrolled agent or an accounting student. Invest in yourself and stay safe.