The Augusta Rule (Section 280A): How to Rent Your Home to Yourself Tax-Free
The Augusta Rule (Section 280A): How to Rent Your Home to Yourself Tax-Free
EXECUTIVE SUMMARY
- The Mechanism: Internal Revenue Code Section 280A(g), known as the “Augusta Rule,” allows homeowners to rent out their personal residence for up to 14 days per year without reporting the rental income to the IRS. It is 100% tax-free income.
- Authority Baseline: This analysis follows the specific exemption outlined in IRC ยง 280A(g), originally designed for residents renting homes during the Masters Tournament but applicable to all US taxpayers.
- Scope Limitation: This strategy is most effective for business owners (S-Corp/C-Corp/LLC) who can legally deduct the rent expense; Sole Proprietors face higher audit risks.
- Anti-Exaggeration: This is not a “loophole” but a codified exemption. It does not eliminate tax on your business profit, but shifts it to a tax-free personal bucket.
Most tax deductions are just shifts. You pay less corporate tax but more personal tax. The Augusta Rule is a vanishing act. The deduction leaves the corporation and disappears into your pocket, never to be seen by the IRS again. According to Team BMT Analysis, this is the easiest $10,000+ tax-free bonus available in the tax code, provided you follow the strict documentation rules. Source: IRS Topic No. 415 (Renting Residential and Vacation Property)
Scenario: You own an S-Corp. You hold monthly board meetings at your home (12 days/year).
- Corporate Side: Your business pays you $1,000/day for the venue (Total $12,000).
Impact: Reduces Corporate Net Income by $12,000. Saves ~$3,600 in taxes (at 30% rate). - Personal Side: You receive $12,000 check.
Impact: $0 Taxable Income. You do not report it on Schedule E. - Verdict: You successfully moved $12,000 from a taxable bucket to a tax-free bucket legally.
Net Cash Comparison
| Distribution Method | Net Cash in Pocket |
|---|---|
| Take Salary (Taxed) | 8400 |
| Augusta Rent (Tax-Free) | 12000 |
*Chart Note: Taking the money as “Rent” instead of “Wages” saves FICA taxes and Income taxes, resulting in significantly more cash in your pocket for the exact same amount of corporate cash flow.
CRITICAL SCENARIO: The “Documentation” Audit
How to prove it wasn’t a party.
| Requirement | What You Need |
|---|---|
| Business Purpose | Meeting Minutes, Agenda, list of attendees (Board/Employees). |
| Reasonable Rate | Quotes from 2-3 local hotels/venues showing comparable daily rates for a meeting room/suite. |
Execution Protocol
Call a local Marriott or WeWork. Ask for a quote: “How much to rent a conference suite for 8 hours for 5 people with catering capability?” Print that quote. That is your “Reasonable Rate” (e.g., $1,500/day).
Decision Order: Confirm Entity Type โ Get Comps โ Draft Lease โ Execute Payment.
Draft a simple rental agreement between “My Business Inc.” and “Me (Homeowner).” Specify the dates (e.g., the first Friday of every month) and the business purpose.
Have the business write a physical check or wire funds to your personal account. Mark the memo “Facility Rental.” Do NOT just make a bookkeeping entry. Cash must move to substantiate the transaction.
WEALTH STRATEGY DIRECTIVE
- Do This: Use the Augusta Rule if you have an S-Corp or C-Corp. It is the first strategy we implement for every business owner client.
- Avoid This: Using it for a Sole Proprietorship (Schedule C). It’s risky because you are “renting to yourself” on the same tax return. It works best with a separate legal entity.
Frequently Asked Questions
Do I report this on my 1040?
No. There is no line for “Tax-Free Rental Income.” You simply do not include it. If audited, you show the Section 280A(g) provision and your log of days.
Can I deduct expenses?
No. Since you don’t report the income, you cannot deduct the costs (cleaning, utilities) associated with those rental days. That would be “double dipping.”
Does it work for vacation homes?
Yes. You can use the Augusta Rule for your primary residence AND your vacation home, as long as each is rented for 14 days or less. (Total 14 days per property).