Augusta Rule: Loophole for Tax-Free Rental Income

The Augusta rule IRS exemption, 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, especially for small business owners. So, if you’ve been asking yourself the question, “Can I rent out my house to myself?” then keep reading.

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…”

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. For example, if you live in Los Angeles near the SoFi Stadium, your home may be rented for only $150 per night on an average day. However, in the days leading up to the 2022 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 Should You Report Exempt Rental Income on the Tax Return?

When filing your tax return, there’s nothing special that you need to do; simply do not report the rental revenue to the IRS. In case you get questioned, be sure to keep detailed records of your rentals. You should be able to prove that you owned the home at the time of the rental, your rates were at market rent and that you used your 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 take advantage of this opportunity:

Use A Rental Website

If you are concerned about liability or if you don’t know how to advertise your 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 Your Rentals During High Market Rent Times

It’s important to use market rent for the Augusta rule. 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.

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, you could rent your home to your 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:

You are part owner in a small business. The business rents your 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 vacation home at market rent.

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

You and the business should keep records that showed the business paid market rent for the rental. You can do this by getting rental quotes from similar locations. You 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 you 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 you should know about. Bring it up the next time you have a tax planning discussion with your CPA. Our Corvee tax planning software has an input specifically designed to show how much you can save when using the Augusta exemption. The software will produce an easy-to-read report that shows how much you (and your business) would save if you 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 show you how user-friendly our deliverables are. By understanding the Augusta rule and other similar tax-saving mechanisms, you can discover incredible tax benefits.