Augusta Rule: How to Rent Your Home to Your Business and Get a Tax Deduction
The Augusta Rule is a nickname for Section 280A(g) of the Internal Revenue Code. This section of the tax code allows homeowners in any income bracket to exclude up to 14 days of rental income from their taxable income. This exemption can be a wonderful tax planning tool, especially for small business owners. So, if you’ve been asking yourself the question, “Can I rent out my home to myself and get a tax deduction for my business while excluding the rental income?!” then keep reading.
What is the Augusta Tax Rule?
The Augusta Rule lets homeowners rent their home for up to 14 days per year without needing to report that 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.
Why is it called the Augusta 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…
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. 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. For example, if you live in Minneapolis, MN near the US Bank Stadium, your home may be rented for only $250 per night on an average day. However, in the days leading up to the 2018 Super Bowl, you might be able to charge $500, $700 or even $1,000 per night for the same rental due to the increased demand. As long as your rent prices are comparable to the market, it should qualify for the exemption.
How does this apply to business owners?
You can rent your primary residence to your business and have your business take a tax deduction for it (as long as it’s for a legitimate business purpose under IRC Section 162).
Your business can take a tax deduction for it up to 14 days in a year and you don’t have to include the rental income on your personal tax return.
Examples of Legitimate Business Purpose:
Your business rents out your space to do any kind of video related production for your business.
Your business rents out your space to facilitate meetings (instead of renting out a room at a hotel or restaurant you are renting out your home).
Your business rents out your space for shareholder or board meetings.
How do you qualify?
You need to have a transaction between your business and yourself so your business needs to operate as its own tax entity (S-Corp, C-Corp, or a Partnership).
You cannot do this with a disregarded entity so a single-member LLC that has not elected out of their default classification will not have this apply to them because you cannot have a transaction to yourself.
How do you know what a fair rental price is?
You cannot rent out your house for an extraordinary amount per day that is not consistent with the local rental prices in your area for your space.
Look on AirBnB or VRBO – Find an equivalent unit for your space and how much that would cost you to rent it out for a day. (Make sure you document this to support and justify your rental price).
For example, if you determine that your equivalent daily rental price is $1,000 per day and you rent your home to your business for 14 days, then your business will receive a $14,000 tax deduction.
Last thing to remember:
Make sure you are actually transacting with your business when you do this.
You need to have an official invoice that shows and documents the day, description of what’s happening, and how much you’re charging your business for the full benefit of the rental.
For the transaction to be legitimate, make sure that your business pays you for it. Businesses cannot claim a deduction unless there is a cash basis outflow which means your business needs to pay your invoice for the deduction to show up in your business books and records.
The famous chip from the 2005 Masters...
Kurt S. Altrichter, CRPS®
Fiduciary Advisor | President
Ivory Hill, LLC and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.