The World Cup is nearing, and for homeowners who rent out their personal residences to visiting soccer fans, the tax treatment of that income can be surprisingly favorable.
IRC Section 280A(g) allows homeowners to rent out a personal residence for up to 14 days in a year without paying federal tax on the income generated from the rental. The Augusta Rule, as it is commonly known, originally passed in 1976 to let residents of Augusta, Georgia rent out their homes to visitors attending the annual Masters golf tournament. The tax benefit has since been used by private homeowners and business owners to generate a short-term, but potentially significant, tax benefit.
How Does the Augusta Rule Work for Homeowners?
Homeowners wishing to take advantage of the Augusta Rule must ensure their home rentals do not exceed 14 days in a tax year. The rental period does not need to be consecutive; a combined 5-day rental for group stage matches in early June, a 4-day rental for the knockout rounds at the end of June and a 3-day rental in mid- July for the finals to different renters, for example, still qualifies. But homeowners who exceed the number of rental days allowed by even one (i.e. 15 days or more) will be liable for federal rental income tax payments for the entire rental period.
The rent charged by homeowners must also be reasonable and align with local market rates at the time. A renter who shows up to see the sites in a local town should expect to pay the homeowner a rate competitive with that of other area rental listings such as Airbnb or local property management. Since rates can go up, sometimes considerably, for major events, such as the World Cup or a national golf tournament, homeowners can generate significant tax-free income by renting their homes to those willing to pay the premium rate charged by other rental managers. The good news for homeowners is that there is no cap on the income they can generate under the Augusta Rule.
The purpose of the rental also does not impact homeowners’ eligibility to benefit from the Rule. Renters may use the home for personal or business purposes. And as we detail in the next section, business owners can also benefit from the Augusta Rule. But qualifying homes must be primary residences or secondary vacation homes. Homes used primarily for business purposes, and which benefit from a home office deduction, do not qualify.
How Can Business Owners Take Advantage of the Augusta Rule?
Business owners can also benefit from the Augusta Rule since their homes can serve as eligible off-site locations for business meetings, retreats, training and strategic planning sessions. Businesses may already deduct facility and meeting space rentals as a normal operating expense. Private residences are attractive options compared to hotels and conference centers as site locations by providing more affordability and privacy. But when a business owner rents their home for a business event, they also benefit as the homeowner from the tax-free rental income. Qualifying business rentals still must comply with the above-mentioned eligibility terms: renting at a reasonable rate and for no more than 14 days.
What Else Should I Know About the Augusta Rule?
While the Augusta Rule does not necessarily have disadvantages, homeowners renting to visitors must clearly understand qualifying activities such as the number of rental days allowed in a calendar year.
Homeowners should also know that expenses associated with renting their residences are not tax-deductible. The full cost of advertising and cleaning must be paid by the homeowner. And while eligible rental income may be excluded from a federal tax return, the same is not necessarily true at the state level. Homeowners are responsible for reviewing their state and local laws and, if appropriate, their homeowner’s association policies to ensure short-term rentals are both allowed and in compliance with permitting requirements and local occupancy taxes.
Finally, homeowners should be mindful of the terms of their current insurance policies. Are visitors covered during short-term rentals? And who is responsible for any damage incurred to the property during the rental? Understanding and addressing the terms of the owner’s insurance policy should be part of any smart risk mitigation strategy before rentals occur. Some owners may find that additional coverage is needed for existing policies.
What Documents Should I Keep to Comply with the Augusta Rule?
As with other tax-related matters, we recommend homeowners and business owners benefiting from the Augusta Rule maintain important documentation to protect against any future IRS audit including:
- A signed and dated rental agreement between the homeowner and the renter with the rental dates, the daily rate, the total rent payment and the rental purpose.
- A list of rental quotes from other providers to ensure alignment with local rates (e.g. Airbnb listings or estimates from local property managers).
- Proof of payment for the rental.
- Proof the home is a personal residence (e.g. property tax bill, utility bills).
- A homeowner log (a simple spreadsheet will do) demonstrating that the home has been rented for 14 or fewer days during a single year.
Business owners should also retain:
- Minutes documenting the business meetings that occurred during the rental.
- Copies of meeting agendas, board minutes, retreat schedules, strategic planning notes and similar documents.
- Clear business expense entries in bookkeeping and/or financial records that match the amount on the rental agreements.
Conclusion
Every year, countless homeowners generate federal tax-free income by renting out their homes. In cases where the draw for visitors is a major event, such as this year’s World Cup which is to be held in several cities across the United States, the income can be significant. Beyond individual homeowners, the Augusta Rule also extends these favorable tax benefits to business owners who rely on off-site rentals as part of their operations.
As with any tax rule, IRC Section 280A(g) requires careful attention to eligibility and compliance. Major events such as this year’s World Cup are expected to increase short term rental activity, and Windham Brannon’s tax professionals can work with homeowners and business owners to help them understand how the Augusta Rule applies to their specific circumstances. Our team advises clients on structuring rentals in a way that aligns with the rule’s requirements while maximizing their potential benefits. To learn more, contact Micah Greenberger.
