There are very few ways you can make income that is actually not taxed at all. Section 280(A)(g) income, also known as the “Augusta Rule,” is one of the few exceptions where you can make income that is completely untaxed. You can also use it as a way to take a significant tax deduction if you own a business.
The Augusta Rule was passed into law in 1976. It allows you to rent out a residence that you own for up to 14 days per year and not pay any tax on the income. It’s known as the “Augusta Rule” because part of the original motivation for the law was to allow homeowners in Augusta, Georgia to rent out their homes tax-free during the Masters golf tournament that takes place there.
This is the relevant section of the tax code:
Notwithstanding any other provision of this section or section 183, if a dwelling unit is used during the taxable year by the taxpayer as a residence and such dwelling unit is actually rented for less than 15 days during the taxable year, then—
IRC 280A
(1) no deduction otherwise allowable under this chapter because of the rental use of such dwelling unit shall be allowed, and
(2) the income derived from such use for the taxable year shall not be included in the gross income of such taxpayer under section 61.
What that means is that income from renting a residence up to 14 days/year is completely disregarded from your taxable income. It also says you can’t deduct expenses related to the rental period either, such as your mortgage interest or utilities expenses, but that makes sense since you aren’t paying tax on the income.
You can use this “loophole” to rent out your home or vacation home for up to two weeks per year and not pay any taxes on the income. Or even better, if you’re a business owner you can rent your own house to yourself for a business use and get a deduction for the rental business expense while still not paying any tax on that rental “income”.
How to Qualify
These are the qualifications you must meet to be able to use this tax provision:
- The property must be a non-business personal residence. It can’t be a rental property or a commercial property, it must only be used as your personal residence. It can be your primary residence, a second home, a vacation home, or even a boat or RV if it has a bathroom and a sleeping area.
- It can only be used as a rental property up to 14 days per year (the days don’t have to be consecutive). If it’s rented 15 days or more, this provision no longer applies and all the income from renting it becomes taxable rental income.
- There is no dollar limit to the amount of rent you can receive, but the rent price can’t exceed the fair market rental value for the property.
If you post the house online and find renters willing to pay to rent the house from you, it’s reasonable to assume they are paying a fair market price for the rental. But if you are renting it to your own business (more on that later), you need to be certain the amount of rent couldn’t be considered excessive. To find out what is reasonable for your market, go to a site like Airbnb and look for similar properties in your area that are available to rent during the same time period. It would also be a very good idea to save a copy of those listings with your other tax records, just in case your rent amount is ever questioned by the IRS. You can save a copy of a web page by using the “print” command in your web browser, and then choosing the option to “Save as PDF.”
Renting to Yourself as a Business Deduction
If you have a legitimate reason to conduct activity for your business at a residence that you own, your business can pay you to rent the home from you. And then you can deduct that rent amount as an expense for your business, and also not pay tax on that rental income if it’s for 14 days or less per year and meets the other qualifications above.
This transaction is only allowed if your business is an S-corp, C-Corp, or a partnership. You can’t use this strategy if your business is a sole proprietorship (schedule C).
For example, you might host an employee retreat for a week at your vacation home twice a year. If the fair market rent is $1000/day and you rent it to your business for 14 days during the year, that’s a $14,000 deductible expense for your business.
Yes, I know, this sounds very similar to tax schemes that are promoted on the internet where tax gurus claim you can funnel personal expenses through your business to claim business deductions on things that aren’t really business expenses. Those are typically disallowed tax schemes that will only get you into trouble with the IRS. This, however, is one of the few exceptions where there is a real loophole that lets you take a tax deduction legitimately and legally.
The IRS is aware that this strategy can be abused, so make sure you really have a legitimate reason for your business to use your home. It could be for business meetings, shareholder meetings, or an event for employees.
But be careful if it is for an event that would be considered “entertainment,” including if it is just a retreat and not used for business meetings or getting work done. Providing entertainment, such as treating clients to a fun event, is no longer a deductible business expense in most cases. There are exceptions if the business provides entertainment at an event that is for the public, or if entertainment is central to the purpose of the company’s business, or if it is a company-wide event for all employees (it can’t be just for executives or highly compensated employees if it is a recreational event that isn’t for work purposes).
You should record documentation about the event. For example, if you are renting your home to hold a business meeting, be sure to record and save the minutes for the meeting and other information including attendees. You should also make an actual monetary transaction from your business bank account to your personal account for the amount of the rent.
Tax Filing Requirements
If a third party rents your home and they don’t issue you a 1099-MISC for the income (which they won’t if it’s not for a business purpose), then you simply don’t have to report the income on your tax return at all if it qualifies for the Augusta Rule.
If you’re renting it to your own business, the rules about reporting business expenses still apply. That means that if the rent amount is $600 or more, you’ll need to complete a 1099-MISC form at the end of the year reporting the rent your business paid to yourself, and a copy of that has to be sent to the IRS.
If you do receive a 1099-MISC for the income (either from your own business, or from another business renting your home), you need to account for that income on your tax return to avoid raising red flags at the IRS. But don’t worry, it’s still untaxed income that gets zeroed out on your return. You do that by reporting the 1099-MISC income on a Schedule E, but then add an “other” expense with the description “non-taxable income under IRS Code Section 280A(g).” Make sure the net income for the Schedule E for the home adds up to $0.
Summary
The Augusta Rule is just one of the ways you can reduce your tax bill if you know that these special provisions exist in the tax code. There may be other ways you can reduce your taxes that you’re not even aware of. Keep reading more in this guide, or contact us if you want us to review or prepare your taxes.
