IRS Section 280A(g), better known as the “Augusta Rule”, is a special rule in the tax code that allows for the rental of a personal dwelling for less than 15 days without being taxed on the rental income. Utilization of this rule in conjunction with a legitimate expense to your business can allow you to achieve both a business tax deduction and tax-free income at the same time.
Originally created for residents of Augusta, Georgia, the “Augusta Rule” was designed to allow locals to rent their homes to attendees of the Masters each year tax free.
Overview of the Rule
The way the rule works is simple – any dwelling that can be characterized as a personal residence can be rented for 14 days or less tax free. The dwelling cannot be a primary place of business but any of the following may qualify as long as used as a residence:
- Primary Residence
- Secondary Residence or Vacation Home
- Apartment or Condo
- Yacht or Houseboat
The 14 days is a cumulative figure so individuals with a secondary residence that they rent at various times of the year will need to be cognizant of their running total. Once you hit 15 days in a calendar year that the home is rented every day becomes taxable.
How to Utilize the Augusta Rule as a Business Owner
As a business owner, you have the ability to use a residence for a business function and pay yourself tax free from the business.
What exactly does that mean? Let’s say you are going to have a corporate retreat to strategize for the upcoming quarter or year – you can host a three day retreat each quarter and the business can pay you a fair market rate for the use of your home. The business can write off the cost of renting the home as a legitimate business expense and you get paid the income tax free.
In order for your business to qualify it must be an S Corp, C Corp, Partnership, or an LLC taxed as one of those three. The business must file it’s own tax return and the use of the house must be shown as a meeting expense. There must be an actual business purpose for the rental of the property – corporate retreat, mastermind meeting, film audio or video marketing for the business are a few ideas. As always, you want to make sure you keep good records and consult with your CPA.
Example: Danny would like to utilize the Augusta rule to rent out his vacation home to his management team for a week long business planning retreat every six months (January and July). Each retreat will be 7 days long and the fair rental rate for his home is $1,000 per day. Danny is able to receive the $14,000 rental payment tax free from his business while also writing it off as a legitimate business expense.
Things to be Aware Of
If the rent is $600 or more in total for the year, a Form 1099-MISC will need to be issued by the business to you as the property owner for rent paid. This can create confusion because the income is not reportable as long as you have remained under the 15 day cap.
As always, you want to make sure you keep good records and consult with your CPA. If you’d like to speak with our team to discuss if this strategy makes sense for your situation and within the context of your overall financial plan you can schedule a time to have an introductory phone call here.
Business Owners: Read about the benefits of adding your kids to the payroll and planning considerations to be aware of here.
Disclosure: This information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors we are not qualified to render advice on tax or legal matters. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional