Depreciation in the Year You Sell a Rental Property

You still get depreciation in the sale year

Many investors are surprised to learn that depreciation is available in the year of sale — right up to the month you sell. Under the mid-month convention for real property, you are treated as placing the property in service (or out of service) in the middle of any given month. This means if you sell in September, you get depreciation for January through mid-September — roughly 8.5 months out of 12.

Example: Your annual depreciation on a residential rental is $12,000 ($12,000 ÷ 12 = $1,000/month). If you sell in September, your depreciation deduction for the sale year is $1,000 × 8.5 = $8,500.

How it affects adjusted basis and recapture

The year-of-sale depreciation deduction reduces your adjusted basis by the same amount, which increases both your total gain and the amount of depreciation recapture. This is not double-dipping — it's the correct accounting: the deduction and the lower basis both reflect the same economic reality.

On your Form 4797 and depreciation recapture calculation, make sure to include the partial-year deduction in your total accumulated depreciation figure. Forgetting it understates your recapture and overstates your capital gain, which misallocates the tax between the two rates.

Personal property and mid-quarter convention

Personal property (equipment, appliances, cost-segregated assets) uses the half-year convention — you get half a year's depreciation in the year the asset is placed in service and half in the year of disposal, regardless of the month. If more than 40% of depreciable personal property is placed in service in the fourth quarter, the mid-quarter convention applies instead, changing the calculation by quarter.

For most rental investors, the real property (building) is the dominant asset. Focus on the mid-month convention for the building and use your depreciation schedule for the personal property items.

How the mid-month fraction is actually computed

The mid-month convention treats the property as disposed of in the middle of the month you sell, so you count full months up to that point plus half of the sale month. The fraction of the year's depreciation you get is (number of full months owned before the sale month + 0.5) ÷ 12. Sell in January and you get 0.5/12; sell in June and you get 5.5/12; sell in December and you get 11.5/12. You do not have to run this by hand — the IRS MACRS depreciation tables already build the mid-month convention into their year-of-disposition percentages, so if you follow the table for the correct recovery year and month of disposition, the partial-year amount comes out automatically. The key is simply to remember to take the disposition-year deduction rather than skipping it because the property was sold.

A full worked example from purchase to sale

You bought a residential rental in March 2019 with a $275,000 building basis, depreciated straight-line over 27.5 years at about $10,000 per year. You sell in September 2026. For 2019 through 2025 you claimed roughly $10,000 each year (with a partial first year), and in 2026 you claim depreciation for January through mid-September: $10,000 × 8.5/12 = $7,083. That final-year deduction lowers your 2026 taxable rental income and reduces your adjusted basis by the same $7,083, which raises your gain and your unrecaptured Section 1250 amount by exactly that figure. Total accumulated depreciation across all years — including the sale-year piece — is what you carry to Form 4797 as the recapture base. Skipping the 2026 deduction would forfeit a real current-year write-off while doing nothing to lower your recapture, because basis is reduced by depreciation allowed or allowable.

You must claim it — the deduction is not optional

The single most important point about sale-year depreciation is that it is effectively mandatory. Under the allowed-or-allowable rule of IRC Section 1016(a)(2), your basis is reduced by the depreciation you were entitled to take whether or not you actually claimed it. So if you forget the partial-year deduction, you lose the deduction but the IRS still treats your basis as if you had taken it — meaning you owe the same recapture with none of the offsetting benefit. Always run the disposition-year depreciation. If you discover in a prior year that you missed depreciation entirely, you generally fix it with Form 3115 (Change in Accounting Method) rather than by ignoring it, because the missed amounts reduce basis at sale regardless.

How to report it

The sale-year depreciation itself is claimed on Form 4562 and flows through Schedule E as part of that year's rental deductions, just like any prior year. When you compute the sale, the total accumulated depreciation — including the partial year — feeds Form 4797 (Sales of Business Property), which separates the ordinary recapture from the Section 1231 gain, and then the unrecaptured Section 1250 gain is carried to the worksheet in the Schedule D instructions. The two forms have to agree: the depreciation you deducted on Form 4562/Schedule E in the sale year must be the same figure included in accumulated depreciation on Form 4797. A mismatch is a common source of IRS notices.

Year-of-sale depreciation in a 1031 exchange

If you dispose of the property in a 1031 exchange rather than a taxable sale, you still take depreciation on the relinquished property up to the date it transfers, using the mid-month convention for the partial year. The replacement property then continues depreciation under the exchange rules (Reg. 1.168(i)-6): the carryover basis keeps depreciating over the relinquished property's remaining recovery period, while any excess basis from new cash or debt starts a fresh schedule. The sale-year deduction is not lost in an exchange — it is simply the last entry on the old property's schedule before the two-part replacement schedule begins.

Common mistakes to avoid

Four errors recur. First, skipping the disposition-year deduction entirely — leaving money on the table while still owing recapture. Second, claiming a full year of depreciation in the sale year instead of the mid-month partial amount, which overstates the deduction and can trigger an adjustment. Third, using the wrong convention — applying the half-year rule to the building (it uses mid-month) or the mid-month rule to appliances (they use half-year). Fourth, forgetting that land is never depreciated, so only the building portion of basis generates a sale-year deduction. Double-check the recovery period too: 27.5 years for residential rental, 39 years for nonresidential real property.

The state tax angle

Most states start from federal taxable income, so your federal sale-year depreciation and the resulting recapture generally carry into the state return automatically. But watch two wrinkles. Some states decoupled from bonus depreciation and Section 179, so if your cost-segregated components were expensed faster federally, your state basis and state recapture can differ, and the state may have its own catch-up in the sale year. And most states tax the entire gain — recapture included — as ordinary income with no 25% cap, so the state cost of the recapture slice can exceed the federal cost. Reconcile any federal-versus-state basis differences before filing so the state recapture is computed on the correct state-adjusted basis.

When depreciation actually stops

The sale date is not always the moment depreciation ends — what matters is when the property stops being held for the production of income. If you move back in, or convert the rental to personal use before selling, depreciation stops on the conversion date, and only the months it was a rental in that final year generate a deduction. On the other hand, a property that sits vacant while genuinely held out for rent — advertised and available between tenants — is still in service, so you continue depreciating it right up to the sale. The distinction matters because taking the property off the rental market early can shorten your final-year deduction and complicate the recapture calculation. If your plan is to sell, generally keep the property listed and available as a rental until the closing so the disposition-year depreciation runs for as many months as the facts support.

Why the final-year deduction usually helps you on net

It is tempting to think the sale-year deduction is a wash — it lowers your basis, which raises your gain by the same amount. But it is usually a favorable rate swap, not a wash. The depreciation deduction offsets that year's rental income (and other income) at your ordinary marginal rate, which can be as high as 37%. The extra gain it creates is taxed as unrecaptured Section 1250 gain at a rate capped at 25%. So for a high-bracket investor, every $1,000 of final-year depreciation can save up to $370 now while costing at most $250 later — a real net benefit on top of the time-value advantage of taking the deduction sooner. That rate arbitrage is exactly why the allowed-or-allowable rule makes skipping depreciation a losing move: you would give up the higher-rate deduction to avoid a lower-rate recapture you owe anyway.

Frequently asked questions

Do I stop depreciation the month I list the property for sale?

No. Depreciation continues as long as the property is held for rental or investment use. You stop claiming it in the month of sale (using the mid-month convention).

How does year-of-sale depreciation affect my recapture?

It increases your accumulated depreciation by the partial-year amount, which raises the recapture taxed at up to 25%. It also reduces your adjusted basis by the same amount.

What convention applies to appliances and fixtures?

Personal property uses the half-year convention — you get one-half year of depreciation in both the placed-in-service year and the year of disposal.

How do I calculate the partial-year amount?

Take your annual building depreciation times (full months owned before the sale month plus one-half) divided by 12. Sell in September and you get 8.5/12 of the annual amount. The MACRS tables build this mid-month fraction in automatically.

What happens if I forget to claim depreciation in the year I sell?

You lose the deduction, but your basis is still reduced as if you had taken it under the allowed-or-allowable rule, so you owe the same recapture. Always claim the disposition-year deduction — it is the last free write-off on the property.

Do I still take depreciation if I sell through a 1031 exchange?

Yes. You depreciate the relinquished property up to the transfer date using the mid-month convention, then the replacement property continues under the exchange depreciation rules of Reg. 1.168(i)-6.

Sources

Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.

Depreciation in the Year of Sale