Words you may need to know (see Glossary):

• Basis
• Convention
• Disposition
• Nonresidential real property
• Placed in service
• Recovery period
• Residential rental property

Under MACRS, averaging conventions establish when the recovery period begins and ends. The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property.

The mid-month convention. Use this convention for all nonresidential real property and residential rental property.

Under this convention, you treat all property placed in service or disposed of during a month as placed in service or disposed of at the midpoint of the month. This means that a one-half month of depreciation is allowed for the month the property is placed in service or disposed of.

The mid-quarter convention. Use this convention if the mid-month convention does not apply and the total depreciable bases of MACRS property you placed in service during the last three months of the tax year (excluding nonresidential real property, residential rental property, and property placed in service and disposed of in the same year) are more than 40% of the total depreciable bases of all MACRS property you placed in service during the entire year. However, see Exception, next.

Under this convention, you treat all property placed in service or disposed of during any quarter of the tax year as placed in service or disposed of at the midpoint of that quarter. This means that 1 1/2 months of depreciation is allowed for the quarter the property is placed in service or disposed of.

Exception. If you are a calendar year taxpayer, or a fiscal year taxpayer whose third or fourth quarter of your 2001 tax year includes September 11, 2001, then you can elect to apply the half-year convention, discussed next, to all property (other than nonresidential real property and residential rental property) placed in service during your 2001 tax year. (For information on applying this exception to a short tax year, see Using the Applicable Convention in a Short Tax Year, later.) To make this election, write "Election Pursuant to Notice 2001-70" across the top of your Form 4562 for 2001.

The half-year convention. Use this convention if neither the mid-quarter convention nor the mid-month convention applies.

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 the year. This means that a one-half year of depreciation is allowed for the year the property is placed in service or disposed of.

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