What is the Augusta Rule and How Can I Use It?

What is the Augusta Rule? 

RS Section 280A(g), better known as the “Augusta Rule”, is a special rule in the tax code that allows for the rental of a primary residence for less than 15 days per year, the resulting income is deemed non-taxable. By utilizing this regulation in conjunction with a valid business expense, you can simultaneously attain a tax deduction for your business and tax-exempt income. 


How Does It Work? 

The rule governing the tax-free rental of personal residences is straightforward. Any dwelling that qualifies as a personal residence may be rented for a period of 14 days or less without incurring taxes. However, it is important to note that the dwelling cannot be used as a primary place of business. The following types of residences may qualify for tax-free rental, provided they are used as a residence: primary residence, secondary residence or vacation home, apartment or condo, yacht or houseboat. It is worth noting that the 14-day rental period is cumulative. Therefore, individuals who rent out their secondary residence at various times throughout the year must keep track of their rental days to avoid exceeding the 14-day limit. Once the rental period exceeds 14 days in a calendar year, all subsequent rental days become taxable. It is imperative that the rental fee you impose is commensurate with the prevailing market rates. Charging $1000 per night for a property that is comparable to others that rent for $200 per night is deemed unreasonable. 


How Does It Work For Business Owners? 

For business owners who do not utilize their residential property as their primary place of business, the Augusta Rule presents a viable strategy for transferring income from their business to personal income without incurring tax consequences. By way of illustration, a business owner may convene monthly meetings with their employees. Under the Augusta Rule, the business may pay the owner a reasonable sum for renting their residence to host the monthly meetings. As long as the rental period does not exceed 14 days and the rent charged is reasonable, the business may claim the rent payment as a deduction on their tax return, and the owner need not report it as personal income. It is imperative to maintain documentation to substantiate the business deduction claim. To demonstrate the reasonableness of the rent, rental quotes for comparable meeting venues may be obtained. To verify that a meeting took place, minutes or other records of business discussions may be retained. 

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