How to Generate Tax-free Income with the “Augusta Rule”
Do you happen to live in a desirable vacation spot? How about an area that hosts major festivals, fairs, or sporting events? If so, you could benefit annually by earning tax-free income with the 14-day rental rule, famously known as the "Augusta Rule." Rent out your home and keep the income—tax-free!
What is the Augusta Rule?
"The Augusta Rule" is named after the famous Master's Tournament in Augusta, Georgia, where local residents found a way to make extra money by renting out their homes to visitors attending the event. The Augusta Rule, officially Section 280A of the IRS code, allows homeowners to rent out their homes for up to 14 days a year without having to report the rental income on their tax return. That’s right, even listing your home on Airbnb or VRBO doesn’t preclude you from benefiting. As long as you stay within the 14-day limit, you’ll owe nothing in taxes. Rent for more than 14 days, and you’ll be taxed on all of the rental income.
What Properties Qualify for the Augusta Rule?
To qualify, the property must be used as a personal residence. This includes your primary home, a vacation house, an apartment, a condo, or even a yacht or houseboat. The IRS defines a dwelling unit as a residence if you use it for personal purposes for more than 14 days or more than 10% of the total days you rent it out.
When to use the Augusta Rule:
Think about the homeowners during the 1984 and 1996 Olympic Games in Los Angeles and Atlanta who rented out their homes to visitors from around the world and earned the money tax-free. Some even rented out their Olympic-sized swimming pools and tennis courts! So, next time you are considering traveling out of town, think about the events happening around you and how you can earn additional cash from renting out your residence.
Business Owners Can Benefit Too!
Business owners can host a company retreat, board meeting, or annual party at their home and have their business pay a fair market rate for using their residence, and the business owner will not have to report that income on their personal tax return. Meanwhile, the business can write off the event as an expense.
For instance, you can rent your vacation home to an executive team for a two-day planning retreat every quarter at $1,000 per day. You can pocket $8,000 tax-free annually while the business deducts the expense. This strategy can apply to S Corps, C Corps, Partnerships, or LLCs with clear separation from individual finances. Sole proprietors, however, should steer clear due to the lack of separation between business and personal finances. If you are unsure where to start, make sure to consult a CPA who can help you navigate the paperwork needed to take advantage of the Augusta Rule.
How Woodward Can Help:
When considering the Augusta rule and any future earnings, it is important to consider how this event will impact your overall financial plan. At Woodward, we can help guide you in navigating any tax and retirement planning questions you may have.