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The Augusta Rule: Section 280A(G)

 

Do you live in a popular destination for sporting events, weddings, conferences? Have you contemplated renting out your home for those events, but do not want to dive into full-time rental real estate? Do you run a business that needs meeting space for annual, quarterly or monthly meetings? The Augusta Rule may be the perfect way to rent out your personal home for specific events, collect income, and not have to worry about the accounting, tax and personal work that goes into rental real estate.

What is it?

               The Augusta rule allows people to rent their personal dwellings for up to 14 days in the calendar year and not report the income on their tax returns. The code section 280A(g) for this rule reads as follows:

               This rule was lobbied for in the 1970s by citizens living in the surrounding area of Augusta National Golf Club. Due to the Master’s Golf Tournament played every April, a large influx of people would come to the area. This drove up the demand for short term rentals in the area, while the rest of the year remains largely unchanged. Local residents wanted to rent their homes to attendees and then return to using the properties the rest of the year. This rule was designed to allow the taxpayers some protection from the tax liabilities and reporting requirements for short term rentals.

Tax Savings

               The tax savings generated from the Augusta rule can add up. Since you are not required to report the income on your federal income tax return under this rule, you are saving on federal taxes. The exact amount saved depends on the income generated as well as your applicable marginal tax rate. There are few rules like this that allow homeowners to generate federal income tax-free from their property. Your state and local revenue agencies may still tax this income depending upon their tax codes, so it is important to speak with your tax preparer and pay any other taxes due.

               If you operate a business that is a Partnership, S-corporation or C-Corporation. You can take a step further and generate tax savings for the business. Your business may be paying for meeting space in hotels or conference rooms to perform a wide variety of functions including annual meetings, strategy sessions, etc. Using the Augusta rule you can charge your business rent or a fee for the use of your home as a meeting space. This creates a tax deduction for your business while generating income for yourself that will be federal income tax free. There are few exceptions to this:

• Use of the Augusta rule is not allowed if you are a soleproprietor or single member LLC filing as a disregarded entity.
• The rule is also disallowed if your residence is the primary place of business for your company.
• Further, you cannot take both the business use of home deduction as well as use the August Rule.

Note: The Augusta Rule can apply for rentals up to 14 days. Once you rent your home for the 15^th day, the benefit of the rule is lost. The income becomes taxable and deductions will be more limited.

Business use:

               The National Championship is being held in your town. All of the hotels are booked full and you know there is more demand for accommodations in your city. You could list your home for rent on Airbnb for the week. The daily rate would need to be set in line with other short-term rentals within your city at that time. Once you have your residence booked you would rent your home for that time period. You would likely receive a 1099-Misc from Airbnb for the rental income received. When filing your taxes you would report this income on Schedule E, then report a matching deduction with a note referencing the code section 280A(g). This will notify the IRS that you are using the Augusta Rule and keep the income from being taxed federally.

               If your business needs quarterly meeting space for required planning meetings, you could rent your home for the day for each meeting. You would need to research the local costs/fees for booking meeting space. This way you are charging in-line with the market. Once the meeting day comes, you would send an invoice to the business to be paid. The business would pay you either with a check, ACH or any other method that generates a paper trail and can be tracked. Cash is not an appropriate form of payment to use for this rule. Following payment at the planning meeting you need to detail that the business paid you for the use of your home as meeting space. The details would include the cost, address, whose home it is, any pertinent details. The business will need generate a 1099-Misc at the end of the year to document the costs. This would be given to you the homeowner and reported as detailed in the paragraph above. The 1099 provides the documentation needed for the business to deduct the expense. This way both you the homeowner and the business get a tax benefit.

Checklist for documentation/Implementation

1. ☐Schedule rental/meeting for your home.
2. ☐Research and document comparables for fair rental price/meeting fee
3. ☐Document business use for meeting (if using in conjunction with personal business)
4. ☐Invoice the business with the details and purpose. (If renting can be done through Airbnb, VRBO, etc.)
5. ☐Pay/Receive the income with a check.
6. ☐Generate and receive the 1099-Misc.
7. ☐Report the income and apply the applicable expense.

References:

1. Internal Revenue Code Section 280A(g) (bradfordtaxinstitute.com)

2. The IRS Section 280A aka The Augusta Rule: Loophole for Tax-Free Business Rental Income for your Home (tehcpa.net)

3. Tax Loophole: The Augusta Rule - Law Firm CPA | Accounting, Tax, and Law Firm Management % (aandtcpas.com)

4. What They Don’t Tell You About the Augusta Rule That Can Cost You Big-Time | USTaxAid