Did you know that you can get a tax break for renting out your home? It’s called the Augusta Rule, and it’s named after the town in Georgia where it was first implemented. Here’s how it works: if you rent out your home for less than fourteen days per year, you don’t have to report the additional income on your taxes.
So if you’re going to be out of town for a while, or if you just need some extra cash, renting out your home is a great way to go!
While this may sound like a good idea, it can be a hassle if you have to deal with strangers and have to go through the hassle of VRBO or other business websites. Here’s how to make use of this rule to maximize your tax benefits. This strategy works great for business owners who have a viable purpose to rent their home to their business.
What is the Augusta Rule?
The Augusta Rule provides tax relief for individuals who rent their homes for less than 14 days per year. Rental income is not taxable, but expenses incurred in renting the property are not deductible.
The Augusta Rule is a special tax law that allows real estate owners to generate income tax-free.
In addition, this rule limits the amount of rental income you can deduct to 14 days. By using this strategy, you can make extra money while renting your home. However, it is important to follow the rules in your local area.
How can it benefit you as a homeowner?
For homeowners, the Augusta Rule is a great benefit. Rental income can be excluded from taxable income, as long as the landlord has a formal rental agreement and a reasonable rental rate.
Further, expenses associated with the home will not be deductible. Lastly, it must not be the primary business location. If it does, however, it will be deductible – as long as the home is not your primary place of business.
If you are a business owner, you may be interested in knowing about the Augusta Rule. This tax law allows you to deduct home rent that you pay on your primary residence for up to 14 days each year.
Fun fact about the origins of the rule
This tax law was initially enacted in order to protect residents of Augusta, GA, from being evicted from their homes during the annual Master’s Golf Tournament. However, the Augusta Rule is not only useful for homeowners who want to save on taxes, but it can also benefit businesses that use their homes for meetings or company gatherings.
By renting out your home during the Master’s Tournament, business owners can enjoy the tax-free rental revenue, and the profits from such a rental will be tax-free as well.
The rules to qualify for the Augusta Rule:
-The property must be rented for less than 14 days in a year.
-The rental agreement must be in writing and should be for a fair market value.
-The property cannot be used as a primary place of business.
-If the property is rented out for more than 14 days, then the Augusta Rule no longer applies and the property is subject to standard rental rules.
If you follow these guidelines, you and your tax advisor may be able to take advantage of the Augusta Rule and keep more money in your pocket at tax time.
As seen on TikTok
This income exclusion has been making headlines recently on the TikTok site. While some TikTok users have offered interesting tax advice on TikTok about renting out your home, the truth is that the Augusta Rule actually exists in the Internal Revenue Code.
Specifically, Section 280A(g) allows homeowners to exclude certain rental income from their taxes.
Section 280A(g) states that “if a dwelling unit is used during the taxable year by the taxpayer as a residence and such dwelling unit is actually rented for less than 15 days during the taxable year, then … the income derived from such use for the taxable year shall not be included in the gross income.”
However, it’s important to remember that the Augusta Rule is not for every property owner.
How to calculate your tax-free rental income and expenses
In order to calculate your rental income, you will need to track how much money you make from each rental. This includes any money made from services such as Airbnb or VRBO.
To maximize your tax benefits when renting out your home, use rental websites such as Airbnb, HomeAway, or VRBO. These websites track rental rates and date ranges. You should also know whether the local government has laws against renting out your home for less than fourteen days.
Keep track of expenses
You will also need to keep track of your expenses, which can include advertising, cleaning, and repairs. While you should report the income from your home, be sure to follow all laws. The Augusta rule is particularly useful for business owners that rent out their primary residence.
It’s essential to have documentation to back up your claim as a business deduction — print rental quotes for comparable meeting locations to demonstrate that the rent was reasonable.
Must be fair market price
The rent you charge must be fair and in line with market trends; charging $1000 per night when comparable houses rent for $200 each is not considered reasonable.
However – It makes no difference how much rental income you earn! There is no restriction on the amount of money made, so you could make thousands of dollars without having to pay anything in taxes if you live near big sporting events. The rates need to be comparable to the rates for hotels in the area of your property.
Senior citizens: What you need to know when it’s time to pay taxes
If you are an elderly taxpayer, you can also use this rule to deduct certain expenses associated with the rental of your home. These expenses can include mortgage interest, real estate taxes, casualty losses, utilities, insurance, and depreciation. These expenses reduce the amount of income that is taxable.
Senior citizens can use Form 1040 to report this supplemental income. However, if the income is less than $600, you do not need to report it on your tax return.
Small businesses: rental income
A small business can use the Augusta Rule for shifting income between personal and business levels. Renting a home to a small business allows the owner to claim a deduction at the business level and exclude it from his/her personal income.
This rule applies to both personal and business rentals, as long as the primary residence is not used for business purposes.
For example, a part-owner of a small business may rent their vacation home to the management team for a weekend every year. During this long weekend, the management team will strategize about the business for the next year.
Renting a primary residence to a business
If you are a homeowner and want to maximize your tax benefits, consider using this rule, you can rent out your home to a small business. This tax-free income is not subject to certain income limits, but it does have specific income restrictions.
You should keep detailed records to support these statements. You should be able to show that you owned the home at the time of rental, that your rent rates were market rent, and that you used the home for personal use during the tax year.
If you are unsure about what to report when filing your taxes, it is best to meet with a tax advisor who understands the tax code surrounding this rule.
Tax-free income for a vacation property
If you own a vacation property, you may be able to claim it as tax-free income. This rule does not require you to report taxable rental revenue to the IRS, but you should keep detailed records. Make sure to prove that you owned the property at the time you rented it, that you charged a market rate for the rental, and that you used it for personal purposes throughout the tax year.
Renting to visitors
If you rent your home to visitors, you may be able to earn tax-free income under the Augusta Rule. The rule provides tax benefits to real estate investors and is available to any taxpayer in the U.S. who rents out a property for more than a week.
If your apartment is used for business, you can claim the deduction from the rental income earned by renting the property.
Renting to businesses
One way to maximize your income (and lower your taxable income) is to rent out your vacation home to businesses. You can use your home as a retreat for business people to plan their next project.
Renting your vacation home to a business will allow you to deduct the expense and exclude the rental income from your taxable income. It’s much cheaper to rent your vacation home than to pay for a hotel conference room or restaurant for the same use. The tax deduction will be at least double the amount you’d have received without renting the vacation home.
Talk to an experienced tax attorney today!
If you’re interested in learning how to use the Augusta Rule for your rental property, it’s important to speak with an experienced tax attorney. The tax code is complex, and there are many rules that apply to different types of properties. A qualified tax attorney can help you navigate the tax code and maximize your tax benefits.
At Damien’s Law, our team is experienced in helping people and businesses navigate the complex world of taxes.
We can help you understand the Augusta Rule and how it applies to your situation. Contact us today.
