Renting out your home, or part of your home, can be a great way to generate some income. If your kids are going off to college, you may want to rent out their room (against their wishes). Maybe you have adult children who no longer live at home and you are empty nesters. Renting out part of your home can be great. Renting out a room or part of your house can also be an easy way to boost your income if you are retired. Something everyone who rents out part of or all of their home needs to know about is the Augusta rule. This tax law can help you save thousands of dollars when it comes time to pay taxes on the income generated from renting out your home.
What is the Augusta Rule?
Before you get too excited, we need to lay out the frame work to the Augusta rule. The Augusta rule is defined in Section 280A(g) of the Internal Revenue Code (IRC). This section states that taxpayers are allowed to exclude certain rental income. Specifically, the code states that if a “dwelling unit” is rented for less than 15 days then no income or deduction is reported.
The term “dwelling unit” includes a house, apartment, condominium, mobile home, boat, or similar property. It also includes all structures or other property appurtenant to such dwelling unit. This gives you a lot of flexibility, especially considering the property does not have to be your primary residence.
How can you avoid taxes on rental income?
The Augusta rule is your answer to helping you avoid taxes on rental income. This can be huge if you live near major sporting events. Terms in this section can be ambiguous, however you can only avoid taxes on income from renting your home out for less than 15 days. This means 14 days at the most.
Why do they call it The Augusta rule?
You may be wondering why this tax rule is called the Augusta rule. Well, the rule actually gets it’s name from the home of the Master’s Tournament. This golf match is played in none other than Augusta Georgia.
As many as 50,000 fans from across the country come to Augusta every year to see the world’s best golfers compete. This is not only a windfall for Augusta but also for the residents who want to earn tax free income.
Augusta Rule Funny Business
With the popularity of this rule, and its advantages, many people try to take advantage of it. They may not be doing this in ways that come to mind. You may have seen or heard that if you rent your home to your business for $1,000 per day for 14 days a year you can write off $14,000 a year without having to pickup rental income. While this is true, there are some details you need to be aware of.
First, you need to have a legitimate business. Plus, it needs to be an actual business expense. Without a written contract between yourself and your business you’ll have a hard time proving this deduction to the IRS. Lastly, the rent needs to be at a fair rental price. Can you actually rent out a room in your house for $1,000?
One more thing you should know is that this trick not work if you are a sole proprietor of an LLC. Single member LLC’s are disregarded for tax purposes so therefore you can’t rent to yourself.
Avoiding Taxes Through the Augusta Rule – Summary
The Augusta rule is one of the tax laws that can actually benefit regular people. To summarize, this rule allows for you to rent out a “dwelling unit” for 14 days or less and not have to pay any income tax on the income generated. This can be huge if you live near major events.
Before you start taking advantage of the Augusta rule, or try to use this rule in combination with a business, check with your financial advisor, accountant, or tax expert.