February 17, 2023
If you are a homeowner, and especially if you also own a small business, you should know about the “Augusta Rule”, which can save you on your federal taxes. Section 280A(g) of the Internal Revenue Code got its nickname because it was originally lobbied for in the 1970s by residents of Augusta, Georgia who wanted to rent their homes to fans attending the Masters golf tournament, without having to pay tax on the rental income. They succeeded, and you can too: Homeowners who rent out their homes for no more than 14 days a year can exclude the rent from their taxable income.
This exemption is available for all kinds of residences, including, for example, a detached home, a rowhouse, a condo, mobile home, secondary or vacation home, or even a boat. Even better, homeowners who also own some kinds of businesses (not all qualify) can get a double tax benefit by having their company rent their personal residence. If it’s done right, the homeowner gets tax free rental income, and the business gets a deduction for the rental expense.
As with most tax matters, getting it right can be complicated. There are a lot of rules. Here are some of them. A residence doesn’t qualify if the homeowner deducts part of the residence as a business use. The residence needs to be rented for appropriate business-related purposes, like business meetings, customer parties, training sessions or staff retreats. The business owner’s residence must be suitable for the rental use in question, and the rent paid by the company must be fair and reasonable and in line with what would be paid to the owner of a comparable property (like a hotel or conference center) in the same vicinity and on the same dates. To protect everyone in case of an IRS audit, proper documentation is needed of comparable rents and the rental should be formally approved by the business and included in the business’s corporate books. If it’s all done correctly, the rent should qualify as a deductible business expense on the company’s tax return and be excluded from taxation for the homeowner – a real “win-win!"