Surprising Tax Deductions: Understanding the “Augusta Rule”

Why you may not have to pay taxes on rental income

In the mid-70s, Section 280A of the U.S. tax code was enacted. Among other things, this allowed people to rent their homes for a certain amount of time and not have to pay taxes on this income.

Since Congress was spurred on in part by taxpayers from Augusta, Georgia, this rule is often known as the Augusta Rule. Because renting out a home during the Masters Tournament can be extremely lucrative, this is also sometimes referred to as the Masters Rule.

How the Augusta Rule works

This rule only applies to a home that isn’t a full-time rental property. In order to benefit, your home can only be rented for up to 14 days per year. And there is no exception to that: If you rent it for 15 days, all of the income you make has to be reported to the government. However, those 14 days do not have to be consecutive.

It doesn’t matter how much you make

Regardless of how much rental income you bring in, as long as you stick to the 14-day cutoff, it is all tax-free. While you may not live in Augusta, it is possible your city will host a big event, such as the Super Bowl, a music festival, or maybe even the Olympics. And whether you rent your home for $100 a day or $1,000, you will not have to worry about taking a tax hit on this income.

You can also rent your home to your business

In addition to renting to individual people, you can also rent your home to your business to claim the same tax benefit.

In order to do this, you need to show how your home is being used for business purposes – such as for meetings or events – and document everything, including who attended and what was discussed. You also need to demonstrate that the rent you charge is reasonable, which is why you should get rate quotes from hotels, locally-rented homes, and other similar venues.

For example, let’s say you want to plan a three-day business retreat for your employees. You do some research and find out that hotels in your area will charge you an average of $2,000 for that duration. If you use your home instead, all you need to do is have your company write you a check for that amount, in addition to compiling the supporting documentation. It can then go right into your personal account.

Even more tax deductions

On top of not having to pay taxes on rental income, you can also take standard deductions on property taxes and mortgage interest. You can’t, however, deduct individual expenses that resulted from the rental, such as utilities.

The taxes that may apply

While you won’t have to add this rental revenue to your yearly income, you may have to pay other taxes. For rentals that are considered short-term – usually a month or shorter – you might have to pay state or local lodging taxes.

These are often calculated using a percentage of what was earned from the rental. It is always a wise idea to learn about your local laws and how they could affect you.

Provident CPA & Business Advisors serves successful professionals, entrepreneurs, and investors who want to get more out of their business and work less, so they can make a positive impact in their lives and communities. Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on the new tax code, and to find out how we can help your business exceed your expectations.