The Augusta Rule is a powerful tax-saving opportunity for homeowners. Here’s everything you need to know about how it works and how to maximize its benefits.
What is the Augusta Rule?
The Augusta Rule is a provision under the U.S. tax code that allows homeowners to rent out their personal residences for up to 14 days per year without having to report the rental income on their federal income tax return. The rule originates from Section
280A(g) of the Internal Revenue Code (IRS).
Key features of the Augusta Rule:
1) 14-day rental exemption:
If you rent out your home for 14 days or fewer in a calendar year, the rental income is not taxable.
Primary or secondary residences:
The rule applies to both primary residences and vacation homes.
No expense deduction:
While the income from these short-term rentals is tax-free, you cannot deduct expenses (e.g., utilities, maintenance) associated with those rental days.
Fair market value pricing:
The rental rate must reflect the fair market value of similar properties in the area.
Why is it called the ‘Augusta Rule’?
The name’s origin can be traced to a city in Georgia. The rule is often referred to as the “Augusta Rule” because it gained prominence in Augusta, Georgia. Residents there rent out their homes during the annual Masters golf tournament. The IRS clarified the provision to accommodate these short-term rental arrangements.
How does the Augusta Rule work?
This rule is commonly used by homeowners who host events, rent their homes for special occasions, or have business-related events at their residences. Business owners, in particular, sometimes use this rule to rent their home to their company for meetings or events, provided the rental rate aligns with fair market value.
Maintaining clear records, including rental agreements, invoices, and documentation of fair market value, is advisable.
The Augusta Rule for Business Owners
Yes, business owners can take advantage of the Augusta Rule. For example, if you host a three-day company retreat for quarterly planning, your company can rent your home and pay you a fair market rental fee. This income is tax-free for you, and your company can deduct it as a business expense.
Can you use the Augusta Rule if you rent?
No, renters cannot use the Augusta Rule. It applies exclusively to property owners who rent out their homes.
Can you use it for multiple properties?
Yes, the Augusta Rule can be applied to multiple properties. Each property can be rented out for up to 14 days per year, provided all other requirements are met.
Can you use the Augusta Rule with an LLC?
Your business must have the right structure. If you are a sole proprietor or a single-member LLC filing a Schedule C, no luck here. Your business must be an S Corp, C Corp, or Partnership. And, if you have an LLC, it must be taxed as one of those to qualify.
How to use the Augusta Rule?
- 1. Identify the purpose: Determine the events or activities you plan to use your home, such as corporate meetings, retreats, or local events.
- 2. Set a fair market rate: Research comparable properties in your area to establish an appropriate rental price.
- 3. Document everything: Maintain thorough records, including rental agreements, invoices, and proof of fair market value.
- 4. Track rental days: Ensure the total rental days for all properties do not exceed 14 days annually.
- 5. Seek professional advice: Work with a tax professional to optimize the benefits and stay compliant with IRS rules.
Planning to use the Augusta Rule? Reach out to us for a rental agreement template.
