Insulin degrading enzyme (IDE), a metalloprotease that degrades amyloid-β (Aβ) peptides and insulin, is associated with Alzheimer’s disease and diabetes. The mechanism of IDE catalyzed degrading of Aβ peptides, which is of fundamental importance in the design of therapeutic methods for Alzheimer’s disease, has not been fully understood. In this work, combined quantum mechanics and molecular mechanics (QM/MM) style Møller-Plesset second order perturbation theory (MP2) geometry optimization calculations are performed to investigate the catalytic mechanism of the Aβ40 Phe19-Phe20 peptide bond cleavage by human IDE. The analyses using QM/MM MP2 optimization suggest that a neutral water molecule is at the active site of the enzyme-substrate (ES) complex. The water molecule is in hydrogen bonding with the nearby anionic Glu111 of IDE, but not directly bound to the catalytic Zn ion. This is confirmed by QM/MM DFTB3 molecular dynamics simulation. Our studies also reveal that the hydrolysis of the Aβ40 Phe19-Phe20 peptide bond by IDE consists of four key steps. The neutral water is first activated by moving toward and binding to the Zn ion. A gem-diol intermediate is then formed by the activated neutral water molecule attacking the C atom of the Phe19-Phe20 peptide bond. The next is the protonation of the N atom of Phe19-Phe20 peptide bond to form an intermediate with an elongated C-N bond. The final step is the breaking of the Phe19-Phe20 C-N bond. The final step is the rate-determining step with a calculated Gibbs free energy of activation of 17.34 kcal/mol, in good agreement with the experimental value 16.7 kcal/mol. This mechanism provides the basis for the design of biochemical methods to modulate the activity of IDE in humans