The Augusta Rule, What Is It, and How Can It Benefit You?

May 14, 2023

An essential part of any financial plan is a tax strategy to help maximize your saving power throughout your lifetime. As a business owner, you have multiple opportunities to keep more of your money in your pocket—if you plan proactively for your taxes. While your life certainly has more complications and uncertainty than the average person, this is one area where you can make the most of your opportunities.

And that brings us to our topic today: a unique regulation, colloquially known as “the Augusta Rule.” It is derived from Section 280(a) in the Internal Revenue Code or IRC.

In today’s blog, we’re going to cover:

  • Why the Augusta Rule exists
  • What the Augusta Rule is
  • Two Specific Examples

The Augusta Rule: What It Is and How It Can Benefit Business Owners

Why Does the Augusta Rule Exist?

Where does the name “Augusta Rule” come from? This is the funny part. Each year, residents of Augusta, GA, rent out their homes for traveling fans (and even the players) of the Masters golf tournament. In the 1970s, the homeowners lobbied the IRS that this was not truly a full-fledged business activity, and their lobbying was met with the writing of Section 280(a).

However, this rule applies to all U.S. homeowners nationwide, not just those in Augusta. If you’re a golf fan, you may be familiar with the rental rates that these homes can garner for the weekend prior to and during the Masters. These can wind up being extremely nice sums of money—and they are completely tax-free.

What Is the Augusta Rule?

Put simply, the rule is a section of the tax code that allows you to exclude income earned from a personal residence on your taxes. This sounds great (and for a rental investor, it sounds like heaven), but it does not apply to rentals. The rule is strictly for a place at which you live, a residence.

The question then becomes, “What, technically, is a residence?”

According to the IRS, a residence is any property that is rented for less than 15 days each year. So, for our purposes, we will talk about a property that is rented for 14 days. The final key is that the rental rates must also be reasonable: If you are renting your house out, especially to a related party, you cannot claim that $1,000 per day is a reasonable rate when the local market rate is $300.

That will not hold up under scrutiny. Any time someone unrelated to you rents the property, it should be at a fair rental rate. To sum it all up, the Augusta Rule allows a homeowner who rents his or her property for 14 days out of the calendar year to earn that income completely tax-free.

Could Business Financial Planning Potentially Help Reduce Your Costs & Increase Profits?

Two Specific Examples

Scenario 1: Vacation Rental

The first scenario is what I would call a true vacation rental, although it does not have to be for vacation. Let’s say that you live in a city with a sports team and have a detached garage or in-law suite: If you rent that area for every home game, and the total time period lasts less than 15 days, you would qualify to exclude that income.

For example, let’s use the following facts:

  • Rental Rate: $1,000 per day
  • Total Days: 10 days
  • Tax Rate: 37%
  • Total Income: $10,000
  • Total Potential Taxes Saved: $3,700

Scenario Two: Business Use

The second scenario is my personal favorite for business owners—and this is what I would call the business-use example. If you own and operate your business, your business can rent your personal residence from you for a fair market value. As long as the days total less than 15, you can exclude that income.

Technically, any business could rent your business for less than 15 days a year, but this includes your business. The first step is that there must be a legitimate business purpose for the use. This is an important distinction. For example, you could have a board meeting at your residence or see a client at your residence. It would not qualify if you simply decided to work from home for a day and tried to list that as a rental agreement between you and the business.

In this case, the rental rate must also be reasonable (and you must be able to provide proof that it was). Listing an exaggerated one would be disallowed. The best form of substantiation here would be an appraisal for the business purpose your home is being used for.

So, how does this work in reality? Let’s use the following facts:

  • Business Income: $500,000
  • Rental Rate: $1,000 per day
  • Days: 12
  • Total Rent: $12,000
  • Tax Rate: 37%

For this approach, the $12,000 in rent is counted as a business expense. As a result, it is deducted from the renting party’s income. This means the business is assessed as having a taxable income of $488,000 which would result in $4,440 less in taxes.

And the best part? Because this residence was rented for less than 15 days, the income is tax-free to you as an individual.

The Sum Total

Ironclad Wealth Management has the experience and expertise to help you make the most of all your tax-saving opportunities. Contact us today to learn more.

If Patrick Can't Save Your Business $5,000 in Taxes, You Get Your Money Back

MGO One Seven LLC ("MGO One Seven") is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). Registration with the SEC does not imply a certain level of skill or training. All titles listed for individuals associated with Ironclad Wealth Management represent the individual's role with Ironclad Wealth Management, and not their role with MGO One Seven. Services are provided under the name Ironclad Wealth Management, a DBA of MGO One Seven. Investment products are not FDIC insured, offer no bank guarantee, and may lose value. Please visit our website for important disclosures.

Please note, the information provided in this presentation is for informational purposes only and investors should determine for themselves whether a particular service or product is suitable for their investment needs. Please refer to the disclosure and offering documents for further information concerning specific products or services.

Nothing provided in this presentation constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments. Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.

Get instant access to our free eBook:
Helping Small Business Owners Achieve Financial Freedom
• How to pay less in taxes
• How to protect yourself & your business
• Getting started with investing
• And more
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.
ebook cover