The Augusta Rule and Tax-Free Rental Income

Have you ever wondered if you could rent out your house to yourself? Sounds a bit crazy, but in reality, the Augusta Rule IRS exemption may allow it. Section 280A(g) of the Internal Revenue tax code allows homeowners to exclude up to 14 days of rental income from taxable income. It doesn’t matter what income bracket the homeowner is in. If you are looking for great tax planning tools, especially if you own a small business, the Augusta Rule may be your answer.

What is the Augusta Rule?

The Augusta Rule allows a homeowner to rent their home for up to 14 days a year without reporting the rental income on individual tax returns. This rule applies to taxpayers whose homes are not their primary place of business.

Why is the Exemption Called the “Augusta Rule”?

The residents of Augusta, Georgia lobbied for the Augusta rule IRS exemption in the ‘70s. The Masters’ golf tournament is held in Augusta each year at the Augusta National Golf Club. The city’s residents wanted to rent out their homes to tournament attendees without the hassles of becoming full-fledged rental businesses. They worked hard, and it paid off. The tax code added Section 280A. Today, homeowners in the US can use the IRS Augusta Rule as it’s not limited to just homeowners in Augusta, Georgia.

How the Augusta Rule Works

Basically, the Augusta Rule means that short-term rentals of your personal residence are not taxable income. However, short-term in this case refers to rentals less than 15 days. There is some “fine print” to this rule that needs to be noted.

• The rental has to be in the personal residence of the taxpayer. It can be a house, condo, apartment, boat, mobile home, or some other similar property as long as the taxpayer uses the dwelling as their residence.
• The Augusta Rule exemption applies to primary homes, secondary houses, and vacation homes.
• The 14-day provision is cumulative. This means it does not have to be consecutive. So, if your primary residence is located close to a popular wedding venue, you have the option of renting your home to guests for different wedding events throughout the year. It will still qualify as long as you do not exceed the 14-day limit.
• Rental prices must be reasonable for the location, date, or event. For instance, if you live near a large venue, you may rent your home fsmallor $150 a night during most of the year. But if there is a large event like the Super Bowl, you can charge the going rate based on the demand.

Does the Rental Income Need to Be Reported on Tax Returns?

The exempt rental income doesn’t have to be reported on your?tax return. Make sure to keep good records so if you are questioned, you can prove:

• You own the home (or owned it at the time of the rental)
• Your rates were at the market value, and
• You use the residence for personal use during the rest of the tax year

Who uses the Augusta Rule, and when should it be used?

Almost any taxpayer can use the Augusta Rule. It is an income exclusion available to every taxpayer no matter what their income level or filing status. Here are a few ways to take advantage of the opportunity:

Using Rental Websites

For those who are not sure how to advertise to renters, or are concerned about liability, a rental website like?Airbnb?or Vrbo may be worth checking out. One advantage of using these types of websites is tracking rent prices and dates if the IRS was to make an inquiry.

Check Your Local Regulations

Make sure to research your local regulations before you rent out your residence. Some local municipalities often have conditions or restrictions on short-term rentals.

Plan Rentals Strategically

Charging market rent prices is important when using the Augusta Rule. But, you want to get the most out of the 14-day rent rule. A little research reveals market peaks throughout the year in your region. You make more tax-free money during periods when rental prices are typically high.

Unique Tax Planning Opportunities for 2021

One of the most appealing aspects of the Augusta Rule is how it can shift income from a?small business. When you do it correctly, you can rent your home out to your small business. This means you get a tax deduction for your business, and the exclusion from income at the individual level. How does that work? Let’s look at an example.

Say you are one of the owners of a small business. The business rents your vacation home for a three-day weekend so they can conduct a planning retreat. You rent it out at market value. The business deducts the price of the rental as a business expense. Since you only rented it for three days at market rates, it is exempt from reporting it on your personal income tax return. Make sure you and the business keep good records of the details. There should also be some records of the business the team conducted while they were using the rental. It’s a win-win.