A Business Owner’s Guide to The Augusta Rule

Are you a business owner? Have you heard of the Augusta Rule? If not, it’s a rule that can save you money on your taxes. The IRS has a complete publication on the rule, but it can be a bit confusing to understand.

I’m going to explain how you can use this rule as a business owner to “pay” yourself and not pay taxes on that same income.

If it sounds too good to be true, don’t worry – it’s 100% legitimate.

What is the Augusta Rule?

The Augusta Rule refers to Section 280A(g) of the tax code. Within this code, the IRS outlines how you can rent out your primary home to your business and all of the rules surrounding it. As you may have guessed, the name of this rule is not what the IRS originally thought it would be called by people.

The Augusta Rule relates to Augusta, Georgia, back in the 1970s. The Masters is held at the Augusta National Golf Club, and it is the largest golf tournament in the world.

Residents of the city wanted to rent their homes, but they didn’t want to make the rental a full-time business. Instead, they wanted to rent their home to the attendees of the event, who are known for paying top dollar for any home close to the event.

And after much lobbying, the residents of Augusta were granted the right to rent their homes, under certain rules, without paying taxes on it. Thankfully, the lobbying led to:

  • Augusta residents being able to rent their homes
  • Residents across the US being able to rent their homes

So, the rule allows you to rent your home to businesses, but there are certain rules that apply to leverage the Augusta Rule in your favor.

Rules You Need to Follow

First, you don’t have to rent your home during the Masters – it can be any time. The rules state:

  • You can rent your primary residence for up to 14 days per year.
  • You do not need to report the income – it’s 100% tax-free.

You can rent your home for up to 14 days per year, even using something like Airbnb or VRBO, and you don’t pay taxes on the money. Once you pass the 14-day threshold, 100% of the money is taxable. 

With this in mind, you’ll also need to meet other requirements:

  • The property that you’re renting must be in the United States.
  • The rent you charge must be reasonable based on market research.
  • The rental use must be for “business” purposes.

If you conduct your own due diligence and do a quick online search to find the going market rate in your area for a similar home, you can use this as a justification for the rental price you charge. Ideally, you’ll rent the home for top dollar during busy seasons to leverage this rule.

Keep in mind that while you won’t be taxed on the rent as income, you cannot deduct any of the expenses relating to the rental either.

Documentation Requirements

Renting to your business (effectively renting to yourself) does require you to keep some documentation, such as:

  • Formal rental agreement
  • Rent payment documentation
  • Businesses must issue a 1099-MISC (more on this below)
  • Include the rent on your tax return
  • Exclude the rental income under 280A
  • Proof of ownership of the property
  • Proof of market-comparable rental prices at the time of the rental
  • Proof that the property was used as a personal residence during the year

Once you have all of your documentation in order, it’s important to avoid common mistakes that are easy to make your first or second time using the Augusta Rule.

Common Augusta Rule Pitfalls

The Augusta Rule can be an effective tax strategy, but there are some pitfalls that you need to be aware of.

One of those pitfalls is not reporting the income. Yes, hear me out.

If the rent is $600 or more for the year, you’re going to receive Form 1099-MISC. The IRS will be looking for Schedule E, which reports the rental income.

But isn’t the rental income NOT taxable? Yes, but if you leave it off, the IRS will surely ask for more information – or just toss you into an audit.

One way to avoid this pitfall is to report the income so that it matches the 1099-MISC, and then reduce it with a footnote explaining why (i.e., cite the IRS tax code). It’s highly recommended that you work with a tax professional to avoid issues with the IRS in this type of scenario.

Another common pitfall is ignoring the fair market value rule.

The Augusta Rule requires your business to pay rent at fair market value. If you decide to rent your home to the business for $5,000 and the fair market rate is $750, you may find yourself in hot water if you were audited by the IRS.

One last thing: You can’t take the home office deduction.

Many business owners don’t realize that they can’t take the Section 280A deduction and the home office deduction. In many cases, the home office deduction is actually greater than what’s available through the Augusta Rule. Your tax professional can help you determine which deduction will be the best option for you.

Final Thoughts

The Augusta Rule is an effective tax strategy for some businesses, but it’s crucial to understand the rules and follow the paperwork requirements to avoid unpleasant surprises from the IRS.

Whenever you want to take a complex tax deduction like this one, it’s best to work with a qualified and experienced tax professional. Along with helping you leverage the Augusta Rule properly, they can also help you find other write-offs and effective tax strategies.

To learn more about how we can help with the Augusta Rule or to schedule an appointment, click here

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