The Augusta Rule: 14 Day Tax Free Home Rental Strategy

Last year, a pre-dental student worked at our office and eventually got into dental school in Augusta, Georgia.  She knew that the Masters tournament was held there but had not heard of the Augusta Rule in real estate.

Frankly, I hadn’t either until I began researching for this article.

The Augusta rule refers to a specific part of the Internal Revenue Code (IRC Section 280a) that gives a tax break for renting out our personal home. It was named when first implemented in Augusta, Georgia, to protect residents of Augusta from being evicted from their own homes each year during the Master’s tournament.

Each year, tens of thousands of golf fans flock to the city to visit the Augusta National Golf Club to watch the tournament. And it didn’t take long for locals to realize they could rent out their homes for some serious cash.

This eventually led savvy Georgia tax professionals to find a tax loophole.

But don’t worry. In order to take advantage of the Augusta Rule, you don’t have to rent your home to golfers or live in Georgia.

This tax strategy is not only useful for homeowners who want to save BIG on taxes, but it can also benefit businesses that use their homes for meetings (more about that shortly).

If you’re interested in learning an alternate way to pay as little taxable income as possible to Uncle Sam, here’s what you need to know…

(Disclaimer: I’m NOT a tax professional. Please check with one before implementing this or any other tax advice mentioned.)

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What is the Augusta Rule?

As previously mentioned, the Augusta Rule (also known as the 14 day rule) started at the Masters golf tournament in Georgia with people renting out their homes.

The subsection of IRS Code Section 280A reads in part, “if a dwelling unit is used during the taxable year by the taxpayer as a residence and such dwelling unit is rented 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, you can rent out your home for 14 days with AirBnB and earn rental income but not have to report that income on your federal taxes. But any expenses incurred in renting the property are not deductible.

If you rent it for 15 days or more, it’s ALL taxable.

It applies to any United States taxpayer, provided that the home is not the primary place of business.

Also, the presence of a home office does not make your home your primary place of business.

The special rule applies to your:

• primary home
• secondary home
• vacation home

Here is a list of assets that are personal residences for Augusta Rule purposes:

• apartment
• house
• boat
• condo
• mobile home

Plan Rentals During High Market Rent Times

A frequently asked question when it comes using this strategy is, “How much can I charge per night?”

Any amount of rent you plan to charge must be a reasonable amount and in line with local market trends. Another consideration has to do with WHEN you plan on renting out your house, as there are plenty of ways you can maximize rent for those 14 days.

You may consider matching your rentals when an influx of visitors creates a spike in demand, including:

• Popular sporting events (Super Bowl, World Series, College football, NBA finals)
• Concerts, conferences, holidays and celebrations such as Mardi Gras 🙂
• Vacation seasons (spring, summer, and winter breaks)

If you’re not sure what a fair market price or fair market value is or are concerned about liability, consider contacting:

• local hotels
• websites such as VRBO, Airbnb, etc.

Look for properties similar to yours. For example, if your house has a pool and hot tub, it’d help to find rates for rentals with these types of extras.

When obtaining a quote, consider these items as well:

• catering
• conference room
• projector/screen
• Internet

Using rental websites is good in case you’re audited, as they track rent prices and rental rates year round. 

Another unique opportunity is having your real estate investing business rent the property from you. Let’s find out how….

Small Business Owners: Rental Income

Another scenario using the Augusta Rule is that you can rent out your personal residence to your corporation for up to 14 days. This allows you to shift business income directly to you (personally) without paying taxes.

The income is not reported and not taxable, and the expense the corporation paid to rent the property is deductible to the corporation.

From a tax perspective, this is fantastic as a business owner.

Example

Dr. T is a radiologist and is tired of paying sky-high federal income taxes. He finds a new CPA to discuss tax strategies to utilize based on his situation.

During their strategy session, the new accountant mentioned using the 14-day rule to lower some of the tax burden.

This is how he plans on implementing it:

Each quarter, Dr. T’s corporation will rent out his home to hold meetings and plan for the upcoming year.

His corporation may use the residence for all types of business meetings, such as:

• board of director meeting
• shareholders meeting
• business planning meeting
• practice budgeting and planning meetings
• meetings with practice advisors (CPAs, attorneys, consultants, etc.)
• investment meetings
• staff meetings

In total, the company rents his main home for 14 days with the fair market rental rate of $10,000 for those days.

Dr. T’s corporation deducts the rental price as a $10,000 business deduction. Because the corporation only rented for 14 days, he does not need to report the $10,000 income.

His new CPA also recommended that while utilizing this strategy, he should:

• obtain quotes for similar locations to prove he charged a fair rental market price
• document actions were taken during meetings with minutes with records of strategic decisions
• keep records of the rental contract

Dr. T is excited to implement his new strategy as it will potentially save him $3500 in federal taxes.

How To Report Exempt Rental Income on Tax Returns

There’s nothing special needed when filing tax returns using the Augusta Rule. As long as you’ve followed the rules given by the IRS, the rental revenue does NOT need to be reported.

If you plan on using the Augusta Rule to rent out your primary residence, consider keeping track of any expenses in case you get questioned, including:

• cleaning
• repairs
• advertising

Make sure you can prove that:

• you owned the home at the time of the rental
• the rates were at market rent
• the home was used for personal use only during the tax year

Key Takeaways

Homeowners (especially high-income earners) can earn tax-free income from their primary residence by using the Augusta Rule.

As long as you don’t go over the 14 day rental period, you can avoid paying taxes on the rental income and make sure everything is documented in writing. 

If you want to learn more about other powerful tax savings strategies, check out the video below:

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FAQs

Who is able to use the Augusta rule?

This rule can be used by homeowners who choose to temporarily rent out their homes. Provided they meet certain conditions, it allows them to receive tax-free income from short-term rentals.

Is this rule different for a C corp?

As mentioned above, this rule is for those who rent out their homes for short periods of time. It’s not specifically related to C Corporations. 

Do you have to own your home to use the rule?

Yes, you must be the homeowner in order to use the rule.

Can an LLC use the Augusta rule?

If a property is owned by someone that’s a member of a LLC and the rental activity meets the requirements of Section 280A, then the LLC can use the Augusta Rule.

Make sure to consult with your tax advisor before using any information in this article.

How does the Augusta Rule impact tax deductions for using my own home for business purposes?

The Augusta Rule, as outlined in the IRS Section relevant to rental use of property, offers a unique tax advantage for homeowners. If you rent out your own home for less than 15 days in a calendar year, the rent payments you receive are exempt from tax under this rule. This means that any income generated from such short-term rentals is not included in your taxable income. It’s important to note that while you can’t claim rental expenses as a tax deduction under this rule, the exemption itself can be a significant tax benefit. By utilizing your home for a legitimate business purpose, such as hosting a business meeting or event, you can take advantage of this rule to enhance your tax savings.

Can I consider rent payments from short-term rentals of my home as a legitimate business expense?

Under the Augusta Rule, homeowners who rent out their property for fewer than 15 days within a calendar year can receive tax benefits. This rule, a part of the tax code, allows you to collect rent payments without having to report them as income. However, it’s crucial to understand that these payments are not considered a legitimate business expense for tax deduction purposes. Therefore, while you benefit from the tax exemption on the rental income, you cannot claim the rent as a deductible business expense. This rule is specifically designed to provide tax advantages without the complexities of declaring rental income and expenses, as long as the rental use meets the stipulated time frame and serves a legitimate business purpose.