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2021 Tax Planning Using the Augusta Rule

The Augusta rule, the Augusta exemption, and the Masters exception are all nicknames 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 2021 tax planning tool for your clients and can be especially beneficial if your clients are also small business owners.

Why is it called the Augusta Rule?

The Augusta rule 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 Augusta Rule extends to all homeowners in the U.S., not just those in Augusta, Georgia.

How Does it Work?

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 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 your client lives close to a popular wedding venue, they might want to rent their home to guests of different weddings throughout the summer and fall. As long as they do not exceed 14 rental days in a single tax year, they can qualify.
  • The rental price must be reasonable for that location on that date. For example, if your client lives in Los Angeles near the SoFi Stadium, their home may be rented for only $150 per night on an average day. However, in the days leading up to the 2022 Super Bowl, they might be able to charge $500, $700, $1,000 per night for the same rental due to the increased demand. As long as their rent prices are comparable to the market, it should qualify for the exemption.

How Should You Report Exempt Rental Income on the Tax Return?

When filing your client’s tax return, there’s nothing special that you need to do; simply do not report the rental revenue to the IRS. In case your client gets questioned, encourage them to keep detailed records of their rentals. They should be able to prove that they owned the home at the time of the rental, their rates were at market value, and that they used their home for personal use during the tax year.

Who Should Use the Augusta Rule, and When?

The Augusta Rule can benefit just about any taxpayer. Because the Augusta Rule is an income exclusion, it is available to all taxpayers regardless of filing status or income level. There are a few ways you can help your clients take advantage of this opportunity. You can encourage them to:

Use A Rental Website

If your clients are concerned about liability or if they don’t know how to advertise their home to renters, using a rental website like Airbnb, HomeAway, or Vrbo might be worthwhile. These websites can track rent prices and rental dates in case the IRS has questions.

Check with Local Regulations

Before your clients begin renting out their home, encourage them to research local regulations. Local municipalities may have restrictions or conditions for short-term renters.

Strategically Plan Their Rentals

To ensure your clients get the most out of their 14-day exemption, encourage them to research when the rental market peaks each year in their city. If they can rent their homes during a time when rental prices are high, they can receive more tax-free income.

Unique 2021 Tax Planning Opportunity for the Augusta Rule

Perhaps the most appealing aspect of the Augusta rule is its ability to shift income from a small business. When done correctly, your client could rent their home to their small business and receive both a tax deduction at the business level and an exclusion from income at the personal level.

Here’s an example of how it might work:

Your client is part owner in a small business. The business rents your client’s vacation home for three days for the management team to use as a planning retreat. During the long weekend, management strategizes about the upcoming year. The business rents your client’s vacation home at market value.

The business can deduct the price of the rental as a legitimate business expense. Because your client only rented their home for three days the entire tax year, they do not need to report that income on their personal income tax return.

Your client and the business should keep records that showed they paid market value for the rental. They can do this by getting rental quotes from similar locations. They should also keep record that the management team performed business duties while using the rental. They can keep meeting minutes or records that show what strategic decisions were made.

By allowing the business to take a deduction for the rental expense and allowing your client to exclude that rental revenue from taxable income, the Augusta rule effectively lets small business owners “double dip” on this benefit. This means that the Augusta rule can be a great tax planning tool for both businesses and business owners.

Find a Tax Planning Software that Uses the Augusta Rule

The Augusta rule is, without a doubt, a tax exemption that your clients should know about. Bring it up the next time you have a tax planning discussion. You can do this more easily if you have a tax planning software that incorporates the Augusta exemption. Our Corvee tax planning software has an input specifically designed to show your clients how much they can save when using the Augusta exemption. The software will produce an easy-to-read report that shows your clients how much they (and their business) would save if they took advantage of this opportunity.

To see how this tax planning software works, please reach out to us. We can give you a demo of the software and we can show you how user friendly our deliverables are. By understanding the Augusta rule and other similar tax-saving mechanisms, you can provide an even better service to your clients.

See how Corvee can help you tax plan using the Augusta Rule and more.

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