The "Augusta rule," also known as IRS Section 280A, is a tax provision that allows business owners to potentially earn tax-free rental income in certain situations. This rule can provide tax benefits for business owners who own property they rent out to their own business.
In a recent webinar, Brennan Bates, CPA discusses the nuances of using the Augusta rule as a business owner.
What is the "Augusta Rule"?
IRS Section 280A, nicknamed the "Augusta rule," allows business owners to rent their property to their own business or any other tenant for up to 14 days per year without having to report the rental income on their tax returns.
This means that the rental income earned during those 14 days is tax-free. The rule got its nickname from the famous Augusta National Golf Club, which rents out nearby homes to spectators during the Masters Tournament each year.
To qualify for the "Augusta rule," the property must be rented out for fair market value, and the business owner must not rent out the property for more than 14 days. If used for more than 14 days, the tax exemption is only applicable to the first 14 days.
Additionally, the business owner must keep accurate records of the rental agreement and payments to substantiate the use of the property under this rule.
Qualifying for the "Augusta Rule"
To qualify for the "Augusta rule," your rental arrangement must meet three key requirements:
- First, the 14-day rule: you can only rent the property to your business for up to 14 days per year.
- Second, you must rent the property to your own business, not to a third party.
- Finally, you must charge a fair rental price for the property, comparable to what you would charge an unrelated party.
If you meet these requirements, you can earn tax-free rental income for those 14 days. This can be a great way to offset some of your business expenses and reduce your overall tax liability.
Limitations and Considerations
While the "Augusta rule" can provide significant tax benefits, there are some limitations and considerations to keep in mind.
- Use limitations: The tax exemption only applies to the first 14 days being rented.
- Documentation: You must keep detailed records to support your use of the "Augusta rule." This includes rental agreements, payment records, and documentation of the fair rental price. Failing to keep proper records could result in the IRS disallowing your tax-free treatment of the rental income.
- Mortgage interest: Using the "Augusta rule" may impact your ability to deduct mortgage interest on the rental property. If you rent out the property for more than 14 days per year, you'll have to allocate your mortgage interest deduction between the rental use and the personal use of the property.
The Augusta Rule in Practice: Real-World Examples
To better understand how the "Augusta rule" can be applied, let's look at a couple of real-world examples.
Example 1: A business owner renting their vacation home to their company for a corporate retreat
Imagine you own a beautiful vacation home near a popular ski resort. Your business is planning a corporate retreat for a week during the off-season. By renting your vacation home to your company for the retreat, you can earn tax-free rental income while providing a great location for your team to bond and strategize.
Example 2: Renting a portion of your primary residence to your business
We hosted an Instrumental Wealth holiday party at my house in December 2023, and we were able to use the Augusta Rule to get a tax deduction for the business.
In my personal experience, I used the "Augusta rule" when hosting my company's holiday party at my primary residence. I charged a fair rental price for the space and made sure to document the agreement and payment records.
By using the "Augusta rule," I was able to earn tax-free rental income from my company, which helped offset some of the costs associated with hosting the event. It was a win-win situation – my company had a great space for the holiday party, and I was able to benefit from the tax-free rental income.
Your Next Steps with the Augusta Rule
The "Augusta rule" (IRS Section 280A) is just one of the tax strategies we review with business owners on a year to year basis. You can check out other valuable strategies here in my comprehensive article: Tax Planning for Business Owners: 15 Strategies to Consider.
our comprehensive article: a valuable tax strategy that allows business owners to earn tax-free rental income by renting their property to their own business for up to 14 days per year. By understanding the requirements and limitations of this rule, business owners can potentially save on taxes and make the most of their real estate investments.
If you're interested in exploring how the Augusta rule and other strategies can potentially benefit your business, contact me here and we can get a call scheduled.
