The Augusta Rule
You may have heard of the Augusta Rule over the last year or so because it has become increasingly popular on social media lately.
The Augusta Rule is part of IRC Section 280A that allows a taxpayer to rent out their home tax-free for 14 days or less without having to report rental income on the individual tax return. This is a true tax loophole.
We’ll walk you through where this came from, what you need to know, and how to qualify for this tax loophole.
The Augusta Rule came about from the Masters tournament held in, you guessed it, Augusta Georgia. Every year homeowners found themselves in the same situation. The local hotels were full and visitors needed places to stay so they looked towards private homeowners.
Along came IRC Section 280A(g) which allowed homeowners to rent their homes out for 14 days or fewer. This became known as the “Augusta Rule”.
Typically this is beneficial for taxpayers that live near popular events such as sporting events, concert venues, or destinations. This is very common in cities that hold the Super Bowl each year. Residents of that city can make a lot of money in one week and not pay tax on that money.
WHAT TO BE AWARE OF
This tax loophole does not apply to sole proprietorships. That is because a sole proprietorship is not separate from its owner like a corporation is, so in the IRS’ eyes you would be renting from yourself which is not allowed.
The main hurdle to this deduction is to make sure your home is not rented out for more than 14 days. If you go even one day over then the full amount of income is taxable.
And the rental income must be at fair market value. What would a non-related third party rent your home for, or what other venues are available on the market? This is typically where taxpayers tend to go overboard. Your daily rental value should not be inflated. We recommend looking at what similar homes would rent for on Airbnb, VRBO, local hotels, or other venues or similar value.
APPLYING IT TO BUSINESS OWNERS
What many business owners may not realize is they can easily take advantage of this tax loophole, if done correctly.
If you own a business, other than a sole proprietorship, then your business could potentially rent your home out for use throughout the year. The 14 days do not need to be consecutive days!
However, you must have a bona fide business purpose, which we’ll give examples of below.
EXAMPLES OF USING THE AUGUSTA RULE
If you live in a large enough city that hosts the Super Bowl or other popular sporting events, you can use the Augusta Rule, but that is not the case for most taxpayers.
For business owners, common examples of this are events such as Board of Director meetings, employee parties, employee training, holiday parties, customer dinners, and other legitimate business purposes.
And keep in mind, you could also receive a tax deduction for out of pocket costs such as food and beverages since this is a business event.
We recommend that our clients keep a log containing the date, fair rental value, description of what it was used for, and who was present. We also want to have other documentation to go along with it depending on what you used the home for. For example, if it was a Board meeting, then we want the minutes from that meeting. This documentation is what will substantiate this tax-free income.
PROPER DOCUMENTATION IS THE NUMBER ONE PITFALL WE SEE.
You should also have documentation on how you determined the fair rental value per day.
And if you are like most entrepreneurs, you probably have more than one business, so keep in mind, the 14 day limit is at the individual level, not the business level, so you can’t have each business rent the home for 14 days each, or you will be over the number of days allowed.
As we’ve explained, this is a legitimate tax loophole, but it must be done correctly to qualify. As with every deduction and tax item, proper documentation is imperative.
Will the Augusta Rule save you a ton in taxes? No, because it is limited, but in our eyes, every little bit helps!
The Augusta Rule and its implications can be quite complex, so each taxpayer should consult with a tax professional to understand how it may apply to their specific circumstances.
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Joy Lutz, CPA, CTP
I help our client’s keep more money in their pockets by implementing proactive tax strategies.
I promise you, working with a CPA and Certified Tax Planner can be much more exciting than crunching numbers and reviewing last year’s taxes.