What Is the Augusta Rule?
And How Can You Use It for Tax-Free Rental Income?
Did you know a tax law created in the 1970s to benefit residents of Augusta, Georgia can be used by homeowners today for tax-free rental income? The Augusta Rule, otherwise known to the IRS as Section 280A, allows residents to rent out their home for up to 14 days per calendar year without requiring them to report the rental income on their personal tax return. How does the Augusta Rule work exactly? Keep reading to find out.
What Is the Augusta Rule?
The Augusta Rule is named for the city of Augusta, Georgia, home of the annual Masters golf tournament. In the 1970s, residents of Augusta lobbied for legislation that would allow them to rent out their homes to out-of-town visitors during the Masters Tournament without needing to report the rental income on their individual tax return. The IRS passed the Augusta Rule accordingly, and today residents anywhere in the U.S. can potentially use it to rent out their homes for 14 days per year, tax-free, as an effective tax strategy.
How Does the Augusta Rule Work?
As with all tax laws, in order to take advantage of the Augusta Rule, certain requirements must be met:
- The rental property must be used as a personal residence, whether home, mobile home, apartment, condo, cabin, boat, etc.
- The rental property can be the homeowner’s place of primary residence, secondary residence, or vacation home.
- Expenses related to the rental of the homeowner’s property(s) for the purpose of the Augusta exemption are not tax-deductible.
- The 14-day calendar year limit is not consecutive, but rather cumulative, meaning the homeowner could rent out a property for 14 days total throughout the year without reporting the income for those 14 days.
- The homeowner must charge a market-comparable rental price for the location, time of year, and demand.
What Do I Have to Do to Use the Augusta Rule?
In order to take advantage of the Augusta tax-exemption, you would simply rent out your place of residence for up to 14 days of the calendar year and not report the rental income on your individual tax return.
You always want to be prepared for an audit by the IRS, though, so if you intend to use the Augusta exemption, you will need proper documentation to support your rental income:
- Proof of home ownership at the time of the property rental
- Proof of market-comparable rental prices at the time of the property rental
- Proof that you used your home for personal residence sometime during the year
How Can the Augusta Rule Benefit My Childcare Business?
As a childcare business owner, you may be able to use the Augusta Rule as a unique tax strategy. Here’s how:
The Augusta exemption affords a legitimate opportunity for small business owners to shift income away from the small business. When implemented correctly, you could potentially rent your home to your childcare business and receive both a tax deduction at the business level and 14 days of tax-exempted income at the personal level. What a win-win!
Here are a few things to keep in mind if you want to use the Augusta Rule as a tax strategy for your childcare business:
- You could potentially rent out your personal residence to your childcare business for the purpose of team meetings, retreats, or conferences for up to 14 days per calendar year.
- Your childcare business can then deduct the price of the rental of your home as a reasonable business expense.
- You and the business need to keep proper documentation to be sure to pass muster with the IRS if you get audited. Proper documentation includes evidence that the business paid market value for the rental, such as price quotes from hotels, retreat venues, meeting halls, and the like, as well as evidence that business duties were conducted during the time of the rental, such as meeting minutes and records.
Finally, be aware of the following limitations imposed by the IRS for business owners seeking to benefit from the Augusta Rule at both a personal and business level:
- You cannot use the Augusta Rule if you already take the business use of home tax deduction.
- You cannot use the Augusta Rule if your business is either a sole proprietorship or a single-member LLC. Your business structure must be either a corporation or an LLC that is taxed as an S-Corp, C-Corp, or Partnership.
- The rent you pay from the business must be of fair market value. Otherwise, your tax return will not stand up to an IRS audit.
We hope you learned something new about the Augusta Rule and how it can be used as a viable tax strategy for homeowners and business owners alike!Are you interested in finding out how to use the Augusta exemption for your childcare business? Reach out to our experts. The professionals at Honest Buck can help you optimize your tax strategy for the year ahead.