In this post, we are going to share with you an easy way you can generate tax-free rental income using the Augusta Rule for up to 14 days per year.
One of the most significant expenses an individual will pay throughout their lifetime is taxes.
The reality is that 95% of us are overpaying the IRS every year without knowing it! When you compound overpaid taxes over decades, the difference could result in you retiring as much as a decade earlier.
Despite the complexities of the US tax code, a good tax advisor will provide guidance on advanced strategies to save you on taxes. Good tax advisors are skilled at identifying different tax saving opportunities and tax loopholes to lawfully minimize your taxes.
One tax loophole we frequently see missed by our new clients is the Augusta Rule deduction for your primary residence.
What is the ‘Augusta Rule’ Deduction?
The Augusta Rule, better known to tax advisors as IRC Section 280A(g), allows homeowners to rent out their home for up to 14 days per year without needing to report the rental income on their individual tax return. This rule applies to any taxpayer who owns a home in the United States as long as your home is not your primary place of business.
TIP: If you are a business owner and do not use your home as your primary place of business, employing the Augusta Rule can be an effective strategy for moving income away from your business and shifting it to personal income, where there would be no tax consequence.
Why is it Call the August Rule?
The Augusta rule IRS exemption was lobbied for by residents of Augusta, Georgia, in the 1970s. Each year, the Masters golf tournament is held at the Augusta National Golf Club, and residents of the city wanted to rent their home to attendees of the tournament without becoming full-fledged rental businesses. Their efforts paid off, and Section 280A was added to the tax code. Fortunately, today, the IRS Augusta Rule extends to all homeowners in the US, not just those in Augusta, Georgia.
How Does it Work?
The Augusta rule Section 280A(g) states in part:
“…if a dwelling unit is used during the taxable year by the taxpayer as a residence and such dwelling unit is actually rented for less than 15 days during the taxable year, then… the income derived from such use for the taxable year shall not be included in gross income…”
In layman’s terms, this means short-term rentals of personal residences are not taxable.
Of course, like with all tax laws, there is some fine print worth noting:
- To qualify for the exemption, the taxpayer must be renting out a dwelling unit that they use as a personal residence. This means that renting out a house, apartment, condo, mobile home, boat or similar property may qualify for the exclusion as long as the taxpayer uses that dwelling unit as a residence.
- The Augusta Rule IRS exemption applies to the owner’s primary homes, secondary homes and vacation homes.
- Expenses related to the rental of these properties are not deductible.
- The 14-day restriction is cumulative and does not need to be consecutive. For example, if you live close to a popular wedding venue, you might want to rent your home to guests of different weddings throughout the summer and fall. As long as you do not exceed the 14 day rent rule in a single tax year, you can qualify.
- The rental price must be reasonable for that location on that date. As long as your rent prices are comparable to the market, it should qualify for the exemption.
How to Meet the Requirements For the “Augusta Rule”
To employ the “Augusta Rule” legitimately, first ensure that you have a lawful business purpose of claiming the deduction at the business level and that it is under 15 days in the tax year. In addition to these two requirements, there are several other conditions to successfully claim this deduction with the IRS.
Evidence of a legitimate business transaction
You will need to show a transaction between one party and another, which in this case is between your business to yourself. This transaction would require a company operating as its own tax entity, which means you need either an S-corporation, a partnership, or a C-corporation.
Unfortunately you cannot do this with a disregarded entity, such as a single-member LLC treated as a sole-proprietorship.
Determine a fair value for the daily rental
The rental fee must be consistent with local rental prices in your area for your space for that day, during that period.
A good tip is to search on Airbnb or Vrbo to see what an equivalent property would cost for the day. If the IRS audited you, this paperwork supports your price and provides evidence backing your claim.
Be certain to find a home similar to your own, located nearby and offering the same number of bedrooms, bathrooms, and comparable square footage..
Create an official invoice.
You will need to create an invoice issued from your name to your business reflecting the associated date(s), the description, and the rental fee of the space. A business cannot claim a deduction unless there’s a cash outflow with support for it.
File a 1099-MISC for the rental income
Finally, if the total rental rate exceeds $600 for the year, make sure you file a 1099-MISC for the rental income at the business level. This is a mandatory reporting obligation that the IRS requires to ensure you are reporting your rental income. The income will be excluded from Schedule E of your Form 1040 personal income tax return.
The IRS 1099-MISC form is used to report different types of miscellaneous compensation (such as rents, prizes and awards, healthcare payments, and payments to an attorney).
Strategically Plan Your Rentals During High Market Rent Times
To ensure you get the most out of your 14-day rent rule, research when the rental market peaks each year in your city. If you can rent your homes during a time when rental prices are high, you can receive more tax-free income.
If you have never heard of this strategy before, or are interested in learning more we highly recommend you contact your tax team or CPA immediately!
*Please note: We are not CPAs or Tax Attorneys, make sure you run everything by a licensed professional before taking advantage of any tax strategy.