Have you ever considered temporarily renting out your home for additional income but decided against it because of the tax implications? Luckily, there’s a way around this for homeowners with the Internal Revenue Service’s (IRS) Augusta Rule, Section 280A(g). Keep reading to learn more about how the Augusta Rule works.
What is the Augusta Rule?
The Augusta Rule, also known as Section 280A(g), allows homeowners to temporarily rent their homes without reporting the rental income on their personal tax return. This tax benefit helps you avoid taxation on rental income, so long as you only rent the home for 14 days or less.
The Augusta Rule can have various use cases, but it’s most commonly used for two purposes: vacation and/or business use.
Renting your home as a vacation space
Many homeowners use the Augusta Rule to rent out their personal residence to tourists. You may particularly benefit from the Augusta Rule if you live in an area with popular attractions or major events, such as a concert venue or an annual sporting event. In this case, you may want to use your home as a short-term rental to generate tax-free income.
Renting your home for business events
Small business owners can also use the Augusta Rule to shift income from their business to their personal finances. If you were hosting a business meeting or planning strategy session in your home, your property becomes the venue you’re using, meaning you’re renting your home to your business. If structured correctly (bona fide rental arrangement, business purpose, fair-market rent, and strong documentation), the business may deduct the rent, and the homeowner may exclude the rent under §280A(g).
What are the rules of the Augusta Rule?
While the Augusta Rule can be a great source of side income, there are still important things to keep in mind if you plan on claiming it:
14-day limit
As mentioned above, you can only rent your home for a maximum of 14 days per tax year to qualify for the Augusta Rule. Anything beyond this timeframe disqualifies the income under the Augusta Rule, making it taxable and requiring it to be reported on your tax return.
Reasonable rent
The rent you charge must be considered reasonable. A reasonable rent should align with the fair rental market price. For example, if similar homes in the area are charging rent for $400 a night, you shouldn’t be charging $1,000 a night. Rent that’s significantly higher than the rent of other rentals in your area would be considered unreasonable and could increase audit risk.
Type of residence
To use §280A(g), the dwelling must be treated as a residence for the year under the IRS definition. In simpler terms, your personal-use days must exceed the greater of 14 days or 10% of the fair rental days. This can be your primary residence or a vacation home.
How do I report the Augusta Rule on my tax return?
Although generally, you’ll need to report all rental income on your individual tax return, you don’t have to report rental income if you only rented the home for 14 days or less. According to the IRS, this is considered “Used as a home but rented less than 15 days,” which automatically excludes it from being considered rental property. You shouldn’t report this income on Schedule E (Form 1040), as you normally would for regular rental income.
However, even though you don’t need to report this income on your return, you may still want to report other home-related expenses on Schedule A (Form 1040). These expenses may include property tax, mortgage interest, and qualified casualty loss. The Augusta Rule only exempts your rental income from tax, not the home itself.
What are the risks of using the Augusta Rule?
The main risks of using the Augusta Rule are being audited or having its credibility questioned. To put it simply, misuse of the Augusta Rule is the primary risk here. You may encounter these pitfalls under the following circumstances.
Poor documentation. Keep clean, detailed records of which days are rental-use days and ensure the business purpose and rental terms are well documented.
Exceeding 14 days of rental. As the primary reason behind the Augusta Rule, you shouldn’t exceed 14 days of rental to qualify for the Augusta Rule.
Overcharging rent. The Augusta Rule only applies if you’re charging reasonable rent, meaning it aligns with the rental rates in the area.
Personal use overlap. You’ll want to ensure there’s no overlap in personal use during the business rental periods.
Unclear business purposes. As with proper documentation, be sure your business purposes are clear to avoid raising questions.
Deducting normal expenses. The Augusta Rule doesn’t make you exempt from the regular taxes your home faces, like property taxes and mortgage interest.
Sole proprietors using the Augusta Rule. Sole proprietors can’t rent to themselves, so the ‘rent your home to your own business’ strategy generally requires a separate taxpayer, such as an S corporation, and strong substantiation.
What documentation is needed for the Augusta Rule?
You can look at the documentation for the Augusta Rule as evidence of its use. Documentation may include:
Receipts
Rental agreements
Meeting agendas and notes
Calendars
Schedule of rental days
Communications, including emails and texts, between you and the renters
What is the Augusta Rule dollar limit?
Technically, there’s no dollar limit to the Augusta Rule, so long as you’re charging a reasonable rent that aligns with fair rental market value. The IRS may verify this through audits if the rent exceeds fair market value.
Who qualifies for the Augusta Rule?
In general, any homeowner can use the Augusta Rule if they follow the rules mentioned below:
Your home is treated as a residence for the year under IRS rules
You rent it out for 14 days or fewer during the year
It’s rented at a fair rental price
Additionally, if you rent your home to a related business (for example, your S corporation), the arrangement should be a bona fide rental with a clear business purpose, strong documentation, and fair-market rent, since related-party rentals can face additional scrutiny.
FAQs
The bottom line
If your home qualifies as a residence and you rent it for 14 days or fewer in a year, you can generally keep the rental income tax-free. However, you should keep in mind that you can’t claim rental expense deductions. Additionally, business-related rentals should be well-documented and priced at fair market value.
File your taxes quickly and accurately when you use TaxAct®.
This article is for informational purposes only and not legal or financial advice.
All TaxAct offers, products and services are subject to applicable terms and conditions.
