Any time you can earn tax-free income, and at the same time claim a tax deduction for your business, that should put a smile on your face.
And you can do it each and every year, several times a year in fact, with a little-known tax break called the Augusta Rule.
Folks who live near the Augusta National Golf Course rent out their homes to the throngs of golfers and fans who flood Augusta for the tournament each year. Some of these folks earn as much as $20,000 renting their homes. And it’s all tax-free.
Over 30 years ago, the congressman who represented Augusta got this tax break written into the code, hence the nickname.
It provides the homeowner a short period of tax-free rental income for their home, condo or apartment for up to 14 days per year without having to include the rental income as part of their taxable income.
But you don’t need to live nearby Augusta National, or even be a golf fan at all, to cash in on this valuable tax break.
It applies to any taxpayer who owns a home anywhere in the United States, provided that your home is not your primary place of business. The rule allows you to rent out your dwelling for up to 14 days and you don’t have to report the income on your individual tax return.
If you own a waterfront home in Florida, or a home in the mountains of Carolina or Colorado, then you can easily earn lucrative short-term vacation rental income, completely tax-free, two weeks every year.
Also, the 14-day exemption does not have to be for consecutive days, so if your home is in a convenient location, you can rent it out over seven weekends each year if you wish.
It’s important to note, however, that the 14-day limit is combined between all of your properties and is at the level of the personal return. You can’t rent your home and your cabin at the lake for 14 days each.
But what if you just don’t want strangers staying in your personal home 14 days per year?
No problem, if you own your own business then you can use your home for business purposes, still earn the tax-free rental income, AND get a business tax deduction at the same time. Here’s how.
Every business has meetings. If your business is an S-Corp., you must hold at least one annual meeting each and every year. But you are free to hold as many meetings as needed.
Let’s say … 14 per year. That works out to 12 monthly meetings, plus an annual and semiannual meeting.
Most companies hold business meetings at hotels, conference centers, a country club, or another suitable off-site location. You can do the same thing, by choosing your home as your off-site meeting location.
The cost to host these off-site meetings is a legitimate, deductible business expense for your company, plus it puts the rental income right back in your pocket tax-free!
Let’s say you compare meeting spaces locally, including costs for equipment rental and catering costs, and it all comes to an estimated $750 per meeting.
There are a few things you should gather and keep as backup material. First, be sure to have all expenses well documented. You’ll need a basic rental agreement between you and your business and invoice for payment. You can generate these items with just 15-minutes’ worth of research and by creating a dozen or so one-page documents.
Also, you will need to keep meeting notes (or minutes) to document what was discussed at the meetings. This is no big deal either. Has your wife ever asked you, “What happened at work today, darling?” Those conversations are business meetings. You just aren’t documenting them as such, but you can easily do so.
Bottom line: You don’t need to be a golfer to take full advantage of the Augusta rule to earn tax-free rental income on your home or other property AND earn a business tax deduction at the same time. If you have questions about how you can best utilize the Augusta Rule, contact TSP Family Office at (772) 257-7888.