Disposition of MACRS Property
Special rules apply when MACRS property is disposed of prior to the end of a recovery period. Under MACRS, a deduction is allowed in the year of disposition, even for Section 1245 property. Use the following rules in the year of disposition:
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Residential and Non-residential Real Property: Always consider the property disposed of at the middle of the month., Thus, a residential rental disposed of on March 3 by a calendar year taxpayer is depreciated for 2.5 months in the disposition year. Prorate the full-year’s deduction by 2.5/12.
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Property Using the Half-Year Convention: The deduction in the year of disposition is half the depreciation allowed for a full year.
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Mid-Quarter Convention Property: Determine the depreciation for a full year first. Multiply the result by 12.5%, if the disposition occurs in the first quarter; 37.5%, if in the second quarter; 62.5%, if in the third quarter; 87.5%, if in the fourth quarter.
Example - Disposition of MACRS Mid-Quarter Convention Property - John placed used 5-year property in service on 12/01/23 at a cost of $10,000. He did not claim any bonus depreciation. The mid-quarter convention applied to the property, because no other property was placed in service that year. In 2023 and 2024 and using the IRS mid-quarter table for assets placed in service in the 4th quarter, John’s depreciation deductions were $500 (.05 x $10,000) and $3,800 (.38 x $10,000), respectively. On 04/06/25, John disposed of the property. His 2025 depreciation deduction is $855 [($10,000 x .228).375]
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4. Short Tax Year: Multiply the basis of the property by the depreciation rate for the year. Prorate the result by the fraction, the number of months the property is in service during the year divided by 12 months.