When you hear the word “Augusta”, you might think of Georgia, southern hospital, or (most likely) The Masters golf tournament. However, there should be 1 more thing you associate with this word – and that is “tax-free rental income”. Yes, you read that correctly. There is a rule in the IRS tax code that allows you to make rental income on your home without paying a dime in taxes on it. It’s called the Augusta Rule, and it can be a smart (and surprisingly easy) way to boost your income.
The Augusta Rule, which was named after Augusta, Georgia, where it started, lets you rent out your home for up to 14 days each year and not pay any taxes on that income. That means whatever rent you collect during those 14 days goes straight into your pocket, tax-free.
Originally, this rule was created to help Augusta homeowners rent out their houses during the Masters Golf Tournament. But today, homeowners anywhere in the U.S. can utilize this strategy.
So how does this rule work? Well, the basic mechanics are pretty simple:
- You can rent out your primary home or vacation home for up to 14 days each year.
- These 14 days do not have to be consecutive. You can rent your property for any combination of days throughout the year, just as long as the total days it is rented out does not exceed 14.
- If you stay under that 14-day limit, you don’t have to report the income on your tax return.
- However, if you rent your property for 15 days or more during the calendar year, then all the income becomes taxable.
- This is why it’s so important to keep track of the number of days you rent the property.
This rule can be especially valuable if you live in an area that attracts visitors for big events or vacations (such as the Super Bowl, Mardi Gras, a major festival, etc.). During these events, demand for rental houses typically goes up, which usually increases the prices of rentals. Thus, you could earn a nice chunk of money in just a few days – all without the IRS taking any taxes.
Now that you know the basics of the Augusta Rule, how can you make the most of it for yourself? Here are a few tips and tricks to keep in mind when trying to harness the full potential of this rule:
- Look at local events. Do some research to find out when demand for rentals in your area is highest. Look for large events such as concerts, festivals, or sporting events.
- Use rental platforms. Airbnb and Vrbo make it easy to connect with renters and check going rates.
- Keep records. Even though you don’t have to report the income, save rental agreements, proof of market-rate comparisons, and receipts. Not only are these things essential for both IRS compliance and business legitimacy, but it’s also good protection if questions ever come up in the future.
- Check local rules. Some cities have rules for short-term rentals, so be sure you abide any local rules your town (or maybe even neighborhood) have.
So far, this sounds like a pretty sweet deal, huh? Well, the deal gets even sweeter if you are a small business owner. The Augusta Rule can be even more powerful if you own a small business because you can actually rent your home to your own business for things like meetings or retreats. If you rented your house to your business for a work function, your business would get a tax deduction for the rental expense, and you (personally) would get the rental income tax-free. Thus, making the Augusta Rule even more beneficial for business owners. Just be sure to document everything properly and save all essential records (rental agreements, proof of market-rate comparisons, receipts, etc.).
At the end of the day, the Augusta Rule is a simple, legal, and effective way to earn up to 14 days of tax-free rental income each year. Whether you live near a big event, own a vacation home, or just want to explore creative ways to save on taxes, it’s a strategy worth considering.
As always, be sure to talk with your tax and/or financial advisor before putting the Augusta Rule into action. They can help you make sure you’re doing it the right way and getting the most benefit out of it.