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The Augusta Rule: How to Rent Out Your Home for Tax-Free Income
SmartAsset Team
5 min read
A homeowner reviewing documents for a rental to make sure that everything complies with requirements for the Augusta rule.
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The Augusta rule allows homeowners to rent out their primary residence for up to 14 days per year without paying federal taxes on the rental income. Originally created for Augusta, Georgia, residents during the Masters Tournament, this rule now benefits anyone using short-term rentals for extra income. However, it applies only to federal taxes-some states may still tax this income, which can create differences between federal and state tax returns, making e-filing more complicated for self-filers.
Consulting with a financial advisor or tax professional can provide further guidance on how to effectively use the Augusta rule.
What Is the Augusta Rule?
The Augusta rule, named after the city of Augusta, Georgia, is a lesser-known tax provision that can offer significant benefits to homeowners. This rule allows homeowners to rent out their primary residence for up to 14 days per year without having to report the rental income on their federal tax return.
Originally designed to accommodate residents of Augusta who rented out their homes during the Masters Golf Tournament, this provision has since become a valuable tax strategy for homeowners across the United States.
The Augusta rule can offer a strategic way to earn tax-free income by renting out your home for short periods. This can be particularly useful for those saving for specific financial goals, such as funding a child’s education or boosting retirement savings.
Who Is Eligible for the Augusta Rule
Any homeowner can qualify for the Augusta tax rule. To take advantage, homeowners must meet specific criteria:
The property must be the owner’s primary residence.
The rental period must not exceed 14 days within a year. This rule is particularly beneficial for those who live in high-demand areas during specific times of the year, allowing them to earn rental income tax-free.
The homeowner cannot claim any rental-related deductions, such as depreciation or maintenance expenses, for the period the home is rented out.
Homeowners need to keep accurate records of rental days and income to ensure compliance with IRS regulations.
The rule is especially advantageous for homeowners in locations that host significant events. For example, residents of Augusta, Georgia, can rent out their homes during the Masters Tournament, a time when rental demand and prices soar.
This opportunity is not limited to Augusta; any homeowner near a major event can potentially benefit. However, you must make sure that the rental period does not exceed the 14-day limit so you can maintain tax-free status.
Ways to Use the Augusta Rule for Your Benefit
Here are four general ways to use the Augusta rule for your benefit:
Host short-term rentals during local events: Renting out your home during local events, such as sports tournaments or festivals, can be lucrative. These events often attract visitors who need temporary accommodations, allowing you to capitalize on high demand and potentially higher rental rates.
Utilize your home for business meetings: If you own a business, consider using your home for meetings or retreats. By renting your home to your business for up to 14 days, you can deduct the rental expense from your business taxes while keeping the income tax-free. Make sure to consult your tax professional to make sure you do this correctly to avoid any potential tax problems.
Plan family gatherings or reunions: Renting your home to family members for special occasions can be both practical and profitable. This approach allows you to host family events while benefiting from the tax-free rental income, provided the rental terms are at fair market value.
Leverage seasonal tourism: If your home is located in a tourist hotspot, consider renting it out during peak seasons. This strategy can help you earn significant rental income without the burden of additional taxes.
Tips for Using the Augusta Rule
A real estate owner reviews tax documents for rental income.
To fully benefit from the Augusta rule, you must plan your rental days strategically. Since the rule only applies to the first 14 days of rental, homeowners should aim to rent their property during high-demand periods when they can command higher rental rates.
Setting a fair market rental rate is also important. The IRS requires that the rental price be consistent with what similar properties in your area would command. Charging an inflated rate could raise red flags and potentially lead to an audit. Research local rental listings, and consider consulting a real estate professional to determine an appropriate rate for your property.
Finally, make sure to have proper documentation for leveraging the Augusta tax rule effectively. Homeowners should keep records of rental agreements, payment receipts and any correspondence related to the rental. This documentation serves as evidence that the rental was conducted at fair market value and within the 14-day limit. In the event of an IRS inquiry, having comprehensive records can help substantiate your claim so you avoid potential penalties.
Bottom Line
The Augusta rule allows homeowners to rent out their primary residence up to 14 days annually without paying federal taxes on the income. This can be useful during big events when demand for short-term rentals is high. However, some states may still tax this income, which can cause differences between federal and state tax returns and make e-filing harder for self-filers.
Tax Planning for Rental Investments
A financial advisor can help you develop a plan to minimize your tax liability on rental income. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
