Chris Wilbratte, a partner with Echelon Financial/Osborn Morano CPAs, rented out his house close to the Austin City Limits music event, taking advantage of the tax-free revenue opportunity.
Wilbratte, like many others, took advantage of a tax code provision commonly known as the Augusta Rule.
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 a year without having to report the income on their federal tax returns.
The Augusta Rule, named after the city in Georgia where the Masters Tournament is held annually, allows property owners to rent out their homes for up to 14 days without reporting the income. This rule was initially lobbied for by local residents of Augusta but can be utilized by anyone who follows the guidelines correctly.
The Augusta Rule, outlined in Internal Revenue Code Section 280(A), permits homeowners to rent out their property for 14 days or less per year without reporting the rental income. As a result, no taxes are owed on this income. However, if the rental period exceeds 14 days, all rental earnings become taxable.
Owners in areas with high demand for short-term rentals, like during major events, can significantly benefit from this rule. Additionally, personal property can be rented to one’s own business, as Wilbratte did, provided it is used for legitimate business purposes. In this scenario, the business can deduct the rent paid, and the owner does not have to report or pay taxes on the rental income.
However, to take advantage of the Augusta Rule, specific requirements and rules must be met, such as charging a reasonable rental rate. There have been instances, like those reported by The Wall Street Journal, where business owners overcharged their companies for renting their homes and failed to keep proper records. This led to significant reductions in the amount they could deduct.
Other stipulations include ensuring the property is not a primary place of business, it has proper facilities, there is a legitimate business reason for the rental, and maintaining proper documentation.
Wilbratte used his property to host an event for his staff and clients during Austin City Limits. He ensured compliance by documenting the going rental rate, maintaining a sign-in sheet for attendees, generating an invoice for bookkeeping, and paying the invoice directly from the business account.
Similarly, The Berkshire Eagle reported on Amy, a cosmetics store owner in Great Barrington, who rented her cabin in Lake George, N.Y., to her own business. She earned $14,000 annually tax-free by using the cabin for team-building exercises and project focus sessions for her employees.
Anyone can take advantage of this special tax rule, as Internal Revenue Code Section 280(A) applies to all property owners. You are exempt from reporting rental revenue if you rent out your home for less than 14 days.
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However, not everyone can earn substantial income from short-term rentals. Business owners may benefit if their company needs to rent their private space, and those in high-demand rental areas can do so. Most people do not find themselves in such situations and must follow the rules to avoid potential IRS penalties.