Whether you call it the “14-day rental rule,” “Section 280A(g) exclusion” or the “Augusta Rule,” the IRS actually allows taxpayers to rent out a personal residence for 14 days or less and exclude that rental income from their taxable income (IRC §280A(g))! Even better, if used properly, not only can you receive tax-free rental income, but your business can also get a tax deduction!
Overview
The strategy got its “Augusta Rule” nickname from people who owned homes in Augusta, GA and would rent them out each year to those coming into town for the Master’s Tournament. While you too could rent out your home on Airbnb for 14 days or less and not have to claim the income, most people find that impractical. Instead, what many business owners take advantage of is having their business rent their home from them.
Examples
So what are some reasons your business might rent your home from you? Your business is likely already paying rental fees. So instead of renting from others, you could be renting from yourself. Examples include:
- Holding a business meeting
- Hosting a strategic planning day
- Holding a company continuing education event
- Hosting clients, vendors, or employees for a meal or staying the night
- Hosting a company picnic or holiday party
It is worth noting
The term “residence” includes not only your primary home, but also any vacation homes, rented apartments, RV’s, boats, etc. If a space provides basic living accommodations such as sleeping space, a bathroom, and cooking facilities, then it qualifies as a “residence.” Plus, you can rent out each of your residences for up to 14 days per year!
For the Augusta Rule to work it has to be between two separate legal entities. Businesses taxed as an C-Corp, S-Corp, or Partnership will be good, but some Schedule C filers will not be able to take advantage of this.
You can’t double-dip on the Augusta Rule and on the Home Office Deduction for the same space in a residence. If you are already getting a deduction for your home-office, you can’t also rent your home office using the Augusta Rule. You can use a different part of your residence (e.g. renting out your sunroom for the day for business meetings), however.
The rental period must be 14 days or less. If you rent your home for 15 days or more, all of the income will become taxable!
Illustration:
Craig and his business partner own their business in an S-Corp. Both owners have an effective tax rate of 35% between federal and state. They take turns hosting a monthly shareholder meeting at each other’s homes. They both live in the same town, and in calling around to hotels & conference centers in their area they determine that the average rate to rent a small meeting room for the day is $500.
Over the course of the year, Craig will rent his sunroom to his business for the day six times. Six times at $500 each time provides $3,000 of tax-free income to Craig, and a $3,000 tax deduction for his business, which provides him tax savings of $900.
How Can You Take Advantage of it?
- Review usage of your home over the past year to see if you had any events that would qualify.
- Look out over the remainder of the year to plan out any ways to use your home before year-end.
- You should be charging your business fair market value for the rental. Make sure the rate you’re charging is comparable to similar rentals in your area. One thing I recommend is to call around to various venues in your area to get quotes. For example, if renting out your living room for a meeting, call hotels to find out what they charge for a small meeting room for the day. If you are hosting a meal, call restaurants in the area to see what the rate is for a private room.
- Sign a simple rental agreement between you & the business (here is a sample template)
- Keep thorough notes about what type of event you held, who attended, what was discussed, what was accomplished, etc. If appropriate, take pictures of the event. Anything you can do to document the event and substantiate it is a good idea.
- You can use the rental agreement as a bill to enter into your accounting software to record the transaction. You will likely record it as a “Rental” expense.
- Finally, pay the bill and transfer payment from your business bank account to your personal bank account.
Used correctly, the Augusta Rule is a very legitimate tax strategy, and can be a powerful way to turn everyday business activities into meaningful tax savings. The key is to plan ahead, document carefully, and make sure your business is paying a fair market rate. With a little preparation, this simple 14-day rule can become one of the easiest wins in your tax strategy.
