Paying taxes isn’t fun. It’s a pain. The pain is why most real estate investors jump at opportunities to earn tax-free income using the Augusta Rule.
The Augusta Rule, or IRS Section 280A, applied to the residents of Augusta, Georgia, who would rent out their homes to attendees of the golf tournament.
Do you want to know more about how the savviest of real estate investors leverage this tax rule to their advantage? Read on to learn more about the Augusta Rule and its potential benefits to your real estate investing business. (This topic was also featured during our Royal Tax Group Mentoring; if you prefer to watch a video replay of the presentation follow this link and jump to 26:00 minutes in: Homeowners Can Earn Tax-Free Income with the Augusta Rule.)
As mentioned, the Augusta rule originated with people renting out their homes. Subsection (g) of the code reads in part, “if a dwelling unit is used during the taxable year by the taxpayer as a residence and such dwelling unit is rented 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.”
The rule applies to any taxpayer who owns a home in the U.S., provided that your home is not your primary place of business. One thing to note here is that the presence of a home office does not make your home your primary place of business.
The Augusta Rule IRS exemption applies to your (the owner):
That means you can rent out your residence for fourteen days and earn rental income but not have to report that income on your federal taxes.
The Augusta rule works when you rent out a dwelling unit as a personal residence.
Here is a list of assets that are personal residences for Augusta Rule purposes:
You may qualify for the exclusion as long as you use that dwelling unit as a residence. While you can earn money through the rule, expenses related to your property rental are not deductible.
There is a 14-day limit on the number of days you can rent your property before claiming the rental income on your federal taxes.
The rule has a provision that states you can only exempt 14 days of rental income from your taxes. On day 15 of rent, you have to report the entirety of the rental income to the government and get taxed accordingly.
The 14 days are cumulative, not consecutive. That matters because it gives you flexible options to generate rental income. For instance, at Super Bowl LVI in Los Angeles, a person who lived adjacent to Sofi Stadium rented their 2,500-square-foot home for $10,000 over the football weekend.
You may not see the same extreme prices, but there are plenty of ways you can maximize your rent for those 14 days. You might consider matching your rentals when an influx of visitors creates a spike in demand, including:
It would be best to charge a fair rental market price and avoid possible legal snags. To help you set the right rental market price:
An advantage of using rental websites is they track rent prices and rental rates that you can present to the IRS should they have questions.
Renting out while your market is hot is a good strategy. Another unique opportunity is having your real estate investing business rent the property from you.
The rule lets you shift income from your small business directly to you without paying taxes. For instance, you could rent your home to your small business to receive a tax deduction at the business level and exclusion from the rental income at the personal level.
Here is an illustrative example of how the August Rule could work for you. Suppose Jason is an owner of a small business.
Each quarter, the business rents Jason’s vacation home to hold meetings, strategize, and plan for the upcoming year. In total, the company rents the vacation home for fourteen days. The fair market rental rate for those fourteen days comes out to $10,000.
Jason’s business deducts the rental price as a legitimate business expense of $10,000. Since the company rented for only fourteen days, Jason does not need to report the $10,000 income.
What should Jason and the business do to ensure he does not get in trouble with the IRS?
In the preceding example, Jason potentially saved $3500 in federal taxes.
Remember to call around hotels to get quotes and check out online rental sites like Airbnb, HomeAway, and Vrbo. Remember to look for similar properties to yours. For instance, suppose your house has amenities, like a pool and jacuzzi. It would be best if you found rates for similar spaces with extras, like a pool and jacuzzi.
Here is a list of things that you should consider when getting a quote:
It is critical to maximize the rent for these fourteen days. One way to do that is to remember the preceding list of invisible amenities your home provides.
The Augusta Rule is a way that homeowners can earn tax-free income from a residence.
Keep in mind these four fundamentals to maximize your income and minimize your entanglement with the IRS:
To learn more about this powerful tax savings strategy and others that you can use to keep more of your earnings, book a tax consultation by taking our tax quiz. The information you provide will enable us to have a productive discussion the first time that we speak.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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