What Is the Augusta Rule?

If you're a golf enthusiast, you may be familiar with the Masters golf tournament held annually in Augusta, Georgia. During the tournament, many local residents rent out their homes to visitors as a way to earn extra income. However, did you know that the IRS has specific guidelines for renting out your home? The Augusta Rule addresses concerns over underreported rental income from short-term rentals.

Overview of the Augusta Rule

• Short-Term Rental Exception:
  Homeowners can rent out their primary residence for up to 14 days per year without having to report the rental income on their individual tax return.

• Who It Applies To:
  This rule is available to any homeowner in the United States who meets the criteria—not just those in Augusta.

A Brief History

• The Masters and Local Income:
  Augusta, Georgia has been hosting the Masters since 1934. Early on, residents began renting out their homes to tournament attendees as a way to earn extra money.

• IRS Concerns and Response:
  The IRS noticed that rental income from these short-term arrangements was often underreported. To address this, Congress passed Section 280A of the tax code. This section created an exception for homeowners renting out their homes for less than 15 days per year—commonly known as the Augusta Rule.

Who Can Benefit from the Augusta Rule?

The Augusta Rule is not only beneficial for homeowners looking to earn extra income but also for business owners:

• Homeowners:
  Earn extra income by renting your home for short periods without the hassle of reporting the income, provided you meet the criteria.

• Business Owners:
  Use the rule strategically to shift income from your business to your personal tax return. For example:

  • A business owner can rent out their home to their business for board meetings.

  • As long as the total rental period does not exceed 14 days and the rent charged is reasonable, the business can deduct the rent payment, while the homeowner does not report the income.

Important:
Always comply with IRS regulations and maintain detailed records to support any claims for rental income or deductions.

What Is the Catch?

While the Augusta Rule can be a useful tax strategy, there are important considerations and limitations:

• Fair Market Value:
  The rent charged must be at fair market value. Research comparable rates and document your findings.

• Eligible Business Structures:

  • Only businesses structured as an LLC, Corporation (taxed as an S-Corporation or C-Corporation), or a Partnership with a separate EIN are eligible.

  • Sole proprietors or single-member LLCs cannot use the Augusta Rule.

  • If you already claim a business use of home deduction, you cannot benefit from this rule.

• Reporting Requirements:

  • If payments exceed $600 in a year, your business should issue you a 1099-MISC.

  • Although you might not pay taxes on the rental income, it should still be reported on your personal tax return.

  • Show a corresponding expense on your tax return to reduce taxable income to $0, and note the relevant IRS tax code for clarity.

• Audit Risk:
  Using the Augusta Rule may attract IRS attention. Ensure your documentation is thorough and consult with a tax professional to minimize audit risks.

Conclusion

The Augusta Rule offers a valuable strategy for homeowners and business owners who wish to earn extra income through short-term rentals without the burden of reporting the income—if done correctly.

However, strict IRS guidelines apply, and meticulous record-keeping is essential. If you're considering this strategy, consult a Texas CPA to ensure you follow all regulations and maximize your tax benefits.