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Tax-Free Rental Income Loophole (Augusta Rule)

Tax

3 min read

Overview

You’ve always been told there is no such thing as a free lunch. Well, believe it or not there is such a thing as tax-free rental income. This loophole bears the name from the town where the Masters golf tournament is held, Augusta, GA. Back in the 1970s residents successfully lobbied congress for a special tax provision that would apply to the short-term rental of their homes during the annual tournament. Fortunately, today the loophole is available to all taxpayers.

How does it work?

Surprisingly, it’s pretty straightforward. Homeowners can rent their home for up to 14 days per year. This is available to all taxpayers who own a home in the United States as long as the home is not your primary place of business.

What could possibly go wrong?

As with all tax laws, there are a few things you should keep in mind. A few gotcha’s if you will:

  • We’re talking about renting a home used as a personal residence. You can have more than one. It just can’t be a commercial property.
  • Don’t get greedy. Expenses related to the rental are not deductible.
  • The 14-day limit is based on a calendar year and days need NOT be consecutive. Keep a running total all year long to make sure you don’t go over.
  • The rental price must be reasonable based on the location and date.

Let’s get creative!

You might not live in Augusta or be keen on turning your home into an Airbnb for two weeks. Ok, that’s understandable. Maybe your small business could rent your home for a management training session once in the spring and again in the fall. This would provide the business with a tax deduction and you with tax-free income. Win – win!

Some additional fine print.

First, this only works if the business is a separate legal entity. That means no sole-proprietors (Form 1040 Schedule C filers).

Furthermore, there should be more in attendance at this meeting than you and your family. Spousal training sessions may be necessary, but not what we had in mind.

Don’t use this strategy to rent your home to entertain patients, prospects, or customers. If you do we risk running into complicated entertainment facility rules. Employee holiday parties or summer picnics are ok.

Finally, documentation could make or break this loophole. Be sure you document what business took place. Rent paid over $600 requires a 1099 be issued, but it can be negated with an expense labeled “Section 280A(g) Exclusion” on Form 1040 Schedule E.

Notice: This generic information is not intended to be taken as tax, legal, benefits, financial, or HR advice. Since rules and regulations change over time and can vary (by industry, entity type, and locale), consult your accountant, lawyer, and/or HR expert for specific guidance.
Scott Patterson

Scott Patterson

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