The Augusta Rule, also known as the Vacation Home Rule, is spelled out in Internal Revenue Service (IRS) Section 280A.¹ ² It states that any taxpayer with a residential dwelling may rent out that residence for fourteen days of the current tax year, and the income derived from that rental will not be included as taxable gross income.
So, here’s what the IRS is saying: Income from short-term rentals of personal residences is non-taxable for fourteen days out of the year. If you rent out all or a portion of your principal residence or a vacation home for less than fifteen days, you don’t have to report the income.
We can call this a tax deduction, but the Augusta rule is technically an exclusion.
Here’s what we’re going to cover in today’s article.
- Properties that qualify for deductions and exclusions.
- Deductible expenses vs. non-deductible expenses.
- Specific rules and limitations you need to know.
- Strategies for renters and business owners.
Let’s get started.
What properties qualify for the Augusta rule?
The Augusta rule applies to any personal residence: a primary home, secondary home, or vacation property.
Apartments, condominiums, and even houseboats all qualify as long as the taxpayer uses the dwelling as a residence.
What’s deductible and what’s not?
As I said previously, the Augusta rule allows for fourteen days of rental income to be deducted or excluded from an individual’s taxable income. That’s what’s deductible.
Expenses related to renting these properties are not deductible. So, you can’t deduct mortgage interest, insurance, or costs directly associated with the rental of the property, like advertising and cleaning.
Rules that you need to know.
Here are the rules and considerations you need to know to execute the Augusta rule and stay in the IRS’s good graces.
Fourteen-day restrictions are cumulative.
In other words, you do not have to rent for fourteen days straight or consecutively. There’s flexibility here. For example, if you live close to a popular wedding venue, you might want to rent your home to guests at different weddings throughout the summer and fall.
You can still qualify as long as you stay within the fourteen-day rental rule in a single tax year.
Rates must be comparable to market rates.
The rental price must be reasonable for the location and date. That means you can’t charge rates that exceed those of comparable residences, from hotels to other short-term rental properties. Consider getting a few quotes from nearby hotels (for the rental strategy) or conference rooms (for the company meeting strategy).
You’ll see examples of the “rental strategy” and “company meeting strategy” below.
Here are two ways to utilize the Augusta rule.
You can take advantage of this opportunity in several ways. I’ll start with a standard approach and finish with what I think is the smartest way to use the Augusta rule.
Earn non-taxable income for short-term rentals.
We’ll start by using the residence you’ve chosen as a short-term rental.
I recommend using a rental website like Airbnb, HomeAway, or VRBO. It’s easy for you, and because these websites can track rental prices and rental dates, it’s an easy way to comply with the market value rule without extensive research. However, I would recommend that you check your local regulations and look for restrictions on short-term rentals.
Remember that comparable rates can be a big positive. However, if you live near a music festival or sporting event, the rates will be high. Look to rent your qualifying residence during peak seasons or special events.
Use company meetings to reduce taxable business and personal income simultaneously.
One of the fantastic aspects of the Augusta rule comes in “double dipping.” This is a legitimate strategy. So, you rent your home to your business for leadership retreats and deduct the equivalent cost of a retreat you’d normally hold at a hotel. It’s an exclusion that lowers your tax liability two times over.
Now, here’s an example of how this might work. You are the owner of a small business. The business rents your home for, let’s say, three days for a management team to use it as a planning retreat.
So, during the long weekend, the management team strategizes for the upcoming year, and the business rents your home at the market rate. Your business can deduct the price of the rental as a legitimate business expense. And, because you only rent your home for three days for the entire tax year, you do not need to report this income on your personal income tax return.
You’ll get the tax deduction for your business and not have to report the income on your personal tax return. It’s a win-win. So, next time you need a space or a meeting location, consider using your personal residence, just like you may use your home office for business-related activities.
Keep detailed records.
In the unlikely event that the IRS audits you, you’ll want to be able to show, in detail, the dates of the rental and what you charged. Remember that you do not need to do anything special with respect to filing. You simply do not report the income. Detailed documentation is critical.
Every penny matters. Niche tax deductions matter.
Is the Augusta rule a game-changer? No, it isn’t. But deductions and credits add up. That’s why every conceivable opportunity to reduce tax liability must be leveraged to maximum effect. That’s how I approach tax planning. Schedule a discovery call today to get started.
Talk soon,
Jeremy A. Johnson, CPA
References
- “Topic No. 415 Renting Residential and Vacation Property | Internal Revenue Service.” Irs.gov, 24 Aug. 2024, www.irs.gov/taxtopics/tc415. Accessed 5 Oct. 2024.
- GovRegs.com. “26 USC 280 – Disallowance of Certain Expenses in Connection with Business Use of Home, Rental of Vacation Homes, Etc.” Govregs.com, 2024, www.govregs.com/uscode/title26_subtitleA_chapter1_subchapterB_partIX_section280A. Accessed 5 Oct. 2024.