The Augusta Rule: A Special Tax Break
Originally created to protect the residents in Augusta, Georgia, who rented out their homes to attendees of the annual Masters Tournament, the Augusta Rule dates back to the 1970s. At that time, residents were interested in avoiding tax complications while renting their homes and profiting from it.
Today, the rule applies to any taxpayer who owns a home in the United States. As a provision within IRS Section 280A(g), this rule lets homeowners rent out their properties for up to 14 days per year without legally having to report the rental income on their federal tax return. Given its potential tax benefit, this rule is not only attractive but also particularly useful for homeowners who reside in small cities that host big events.
The rent you charge must be reasonable and in line with what the rental market supports. If you’re a business owner and don’t use your home as your primary place of business, using the Augusta Rule can be an effective strategy for moving income away from your business and shifting it to your personal income, where there would be no tax consequences.
How it works
Say you host a monthly meeting with your board of directors. Your business can pay a reasonable amount to rent your house to conduct the once-a-month meetings. Provided the total rental period doesn’t exceed 14 days and the rent charged is reasonable, your business is able to deduct the rent payment on the business tax return and you won’t have to report this as income on your personal taxes.
Here are the details on how the exemption works:
The home you’re renting must be a residence, though it doesn’t have to be your primary residence. As a result, vacation homes are eligible for the Augusta Rule exemption. In fact, they can be great candidates for this tax break since you’ll be renting out the property when you’re already planning not to be there anyway.
There’s no income limit that you must adhere to in order to benefit from this tax exemption.
You’ll likely need to pay for cleaning costs when renters leave the property at the end of their stay.
Make sure your lease agreement covers who is responsible for damages to your home or property, just in case.
Check your homeowners insurance policy to see if it covers short-term rentals. If your current policy does not suffice, you may need to purchase additional coverage or make the insurance company aware of your plans.
The days you rent out your home don’t have to be consecutive as long as the total doesn’t exceed 14 days per tax year. If you adhere to this rule, then the income that your property generates will be tax-exempt.
If you decide to use the exemption as a means of renting out your home for meetings, make sure you keep detailed records that you can show the IRS, if necessary, and look into how you can charge a competitive rate based on the current market.
You might be curious about the rental market prior to diving into long-term commitments or rental agreements. The Augusta Rule can be used as a way to test the waters before deciding to rent out your property more regularly or letting people stay at your place when you’re away for short periods.
You can rent out a large or unique property for special occasions — such as weddings, parties or corporate events — whenever there is interest or demand in the area.
The 14-day rule that is imposed by the Augusta Rule is about exempting a portion of your income, not about creating tax deductions. You can even deduct any mortgage interest or property taxes as usual, but you can’t deduct any rental expenses you incur by taking advantage of the Augusta Rule.
All in all, the Augusta Rule can provide property owners like you with a unique tax-saving opportunity. However, it’s important to understand who this rule benefits and when it’s most effectively used so you can make informed decisions prior to renting out your property. It doesn’t hurt to consult with a tax professional before assuming that your situation automatically qualifies.
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