Rich Americans are using the Augusta Rule to generate tax-free income for themselves — can you use it too?
During the Austin City Limits music festival, Chris Wilbratte, a partner at Echelon Financial/Osborn Morano CPAs, rented out his home near the festival grounds and earned tax-free income.
Wilbratte, like many others, took advantage of a provision in the tax code commonly called the Augusta Rule.
Don't miss
Commercial real estate has beaten the stock market for 25 years — but only the super rich could buy in. Here's how even ordinary investors can become the landlord of Walmart, Whole Foods or Kroger
Cost-of-living in America is still out of control — use these 3 'real assets' to protect your wealth today, no matter what the US Fed does or says
These 5 magic money moves will boost you up America's net worth ladder in 2024 — and you can complete each step within minutes. Here's how
He saved around $500 in taxes thanks to favorable IRS regulations allowing property owners to rent out their private residences and vacation homes for up to 14 days in the year without having to report the income when they file their federal tax returns.
The Augusta Rule gets its name from the city in Georgia where the Masters Tournament, a major golf championship, is played each year. The local residents famously lobbied for the exemption, but it can now be applied anywhere by anybody if they do it right. Here's what you need to know.
How does the Augusta Rule work?
The Augusta Rule refers to Internal Revenue Code Section 280(A), which allows owners to rent out their property for 14 days or less in a year without reporting the income they earn. Since the income isn't reported, no taxes are due on it. If the number of days goes above the limit, all rental earnings become taxable.
Owners of properties located where the Masters Tournament was played benefited from this rule as they could rent out their homes for large sums during the tournament without being taxed on the income they earned. Anyone who lives in an area where there's temporarily a very high demand for short-term rentals can do the same.
One can also rent out their personal property to their own business, as Wilbratte did, as long as it's used for true business purposes. In this situation, there are two benefits — the company can claim a deduction for the rent paid while the owner who puts the rental income into their bank account doesn't have to report or pay taxes on the money earned.
The rules of the Augusta Rule
While the Augusta Rule offers a great opportunity to save, you can't take advantage of it unless you can meet specific requirements and follow the rules, like charging a reasonable rental rate. The Wall Street Journal reported on a case of business owners who rented out their homes for meetings and charged their company much more than the going rate in the area. They did not keep good records either. A judge called their actions a “tax-savings scheme” and reduced the amount of total rent they could deduct from $290,900 to $16,500.
Some other rules are that the property cannot be a primary place of business, there must be eating, sleeping and toilet facilities, there must be a legitimate business reason for your company to rent the property, and proper documentation must be maintained.
Read more: Car insurance rates have spiked in the US to a stunning $2,150/year — but you can be smarter than that. Here's how you can save yourself as much as $820 annually in minutes (it's 100% free)
Wilbratte indicated he used his property to host an event for his staff and clients before Austin City Limits because of its close proximity to Zilker Park, and he made certain to follow these rules.
"Because event spaces are in such high demand during ACL, we called around to document what the going rate was for spaces on the date we hosted our event, which was $1000," he said. "We documented that the event actually happened through a sign-in sheet. We also generated an invoice for our bookkeeping and then paid the invoice directly from the business."
The Berkshire Eagle also reported on Amy, a cosmetics store owner living in Great Barrington, renting her cabin in Lake George, N.Y. to her own business and earning $14,000 annually tax free this way. According to the article, “Seven times a year, she lets some of her employees take the cabin for a weekend for team-building exercises and a Zoom-free 48 hours to focus on important projects. That’s 14 days of tax savings and productivity.”
Can anyone take advantage of this special tax rule?
The good news is, Internal Revenue Code Section 280(A) applies to all property owners of all tax brackets. If you have a tenant for 14 days or less and earn rental income from them, you don't have to report the money you earn.
The bad news is, not everyone can earn a good amount of money from a short-term rental. Business owners can do this if their company has a need to rent their private space. So can people who rent their homes to strangers if their property is in a location where there's high demand for a limited time.
Most people don't find themselves in this situation, though. Those that do also must make sure to follow the rules so their efforts to save don't lead to a bigger IRS bill -- and penalties -- later on.
What to read next
Car insurance premiums in America are through the roof — and only getting worse. But 5 minutes could have you paying as little as $29/month
Jeff Bezos and Oprah Winfrey invest in this asset to keep their wealth safe — you may want to do the same in 2024
Stop crushing your retirement dreams with wealth-killing costs and headaches — here are 10 'must-haves' when choosing a trading platform (and 1 option that has them all)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
