How Doctors Can Use the Augusta Rule to Save on Taxes

Do you have a home? If so, you have the opportunity to generate tax-free income using the ‘Augusta Rule’. Named after the original scenario in which residents of Augusta, Georgia, rented out their homes during the annual Masters golf tournament, this rule provides a valuable opportunity to earn tax-free income and deductions you don’t have to pay for by renting out your personal property. house or holiday home.

Let’s take a look at the basics, benefits, and requirements of the Augusta Rule so you can implement this strategy while complying with IRS regulations.

What is the Augusta Rule?

The Augusta Rule refers to Section 280A of the Internal Revenue Code (IRC), which allows homeowners to rent out their property for up to 14 days per year without paying taxes on the rental income on their federal tax returns.

This exemption also applies if the income received is substantial, as long as the home is not rented for more than two weeks and the owner personally uses it for more than 14 days or 10 percent of the total number of rental days.

Some other requirements include:

  • The home may not be your principal place of business
  • The rent you ask must be reasonable and in line with what the market supports

When can you take advantage of the Augusta Rule?

There are two ways to potentially benefit from the Augusta Rule.

Firstly, if you live in a holiday destination, own property in attractive locations during busy local events, or own a large or unique property that could be ideal for hosting special events, you can save your home tax-free for up to 14 days rent. . In addition to the Masters golf tournament, many homeowners take advantage of this loophole during major sporting events, such as when the Super Bowl or a March Madness tournament comes to town.

However, you don’t have to rent your home to strangers to take advantage of this legal tax loophole. If you have a business and don’t use the home as your main office, you can hold monthly meetings with your board of directors or host quarterly partner retreats at your home. The company can pay you a reasonable amount to rent the house for the day. As long as the total rental period over the course of a tax year does not exceed 14 days, this is an effective strategy for generating a tax deduction for the business without having to report the income on your personal tax return.

Implementing the Augusta Rule: Step-by-Step Guide

Proper planning and documentation are the keys to successfully applying the Augusta Rule. Therefore, here you will find a step-by-step guide to its application.

Step 1: Know the rules

Before you rent out your home, you need to understand the rules so that your transaction qualifies for the exemption.

Here are the high-level requirements you need to consider:

  • The home can be your main home or a second home, as long as it is not your main place of business.
  • You must use the property personally for more than 14 days or 10 percent of the total number of days it has been rented to others at a fair rental rate, whichever is longer. Otherwise it is considered a rental or investment property and all rental income is taxable.
  • The property must be located in the US; real estate abroad is not eligible.
  • If you rent the property to your business, it must be a corporation, partnership or limited liability company (LLC) that files its own tax return.

Also check local laws and homeowners association rules to make sure short-term rentals are allowed.

Step 2: Plan the rental period

Choose a period that does not exceed the 14 day threshold. You do not have to rent the house for 14 consecutive days; works one day per month or a few days per quarter.

However, if you exceed 14 rental days, all days the property is rented will become taxable.

Step 3: Set a competitive rental rate

The rental price must be reasonable and supported by market research. Research comparable rental prices in your area to determine a competitive rate.

You can consult websites such as Airbnb and VRBO or consult a real estate professional to accurately determine your rental. If you do the research yourself, try to find homes that are similar in location, size and amenities to yours. It is recommended that you find two to three comparable properties and take an average price per square foot before applying the rental rate to the square footage of your home. Be sure to keep printouts or other documentation to justify your research and keep it with your tax records.

Please note that even if the income is not taxable, you cannot claim any costs you incur when renting the property. It is therefore wise to include these costs in the rental price.

Step 4: Advertise your rental property

If you are not renting the property to your business, market it through online rental platforms, local classifieds or your professional network. There are even companies that manage the bookings and clean your home before and after the rental period, so that you can be sure that it is in order when you return.

Make sure potential tenants understand the details of the lease, including duration and amenities.

Step 5: Manage the rental process

Draw up a formal rental agreement that sets out the rental terms.

If you rent the property to your company, the company must issue you a 1099-MISC at the end of the year for the rent paid. You still claim the income on your federal tax return, but it is excluded from tax under IRS Section 280(A).

Keep detailed records of rental period and income for personal tracking and compliance. If you are using the property for business, document business activities by keeping copies of meeting minutes or retreat agendas, attendee lists, etc.

Using the Augusta Rule: An Example

Let’s look at a fictional example to see how using the Augusta rule might work for you.

Dr. Jones, a physician and co-owner of a multi-specialty clinic, owns a spacious lake house in a popular resort area near the city. Recognizing the potential of the Augusta Rule, she decides to strategically rent out her lake house for the clinic’s quarterly partner retreats.

Dr.’s lake house Jones is a well-appointed five-bedroom home with a large dining room that can be used as a meeting room and amenities suitable for luxury retreats. Dr. Jones confirms that local regulations allow short-term rentals, and the homeowners association has no restrictions against the practice.

The house is rented for two days every quarter, a total of eight days per year. The clinic’s partners and key management staff attend each event, which focuses on strategic planning and relaxation.

Dr. Jones enters into a formal lease agreement with the clinic to rent the lake house. The agreed rental rate is $2,000 per day, which reflects the market rate for such properties during peak hours. Dr. Jones maintains all lease agreements, receipts, income records and meeting agendas to provide clear documentation in the event of an IRS audit.

By renting the property for $4,000 per event, Dr. Jones receives $16,000 annually from these retreats.

Under the Augusta Rule, Dr. Jones does not have to pay taxes on this $16,000 on her federal income tax return since the property is rented less than 14 days per year. Although the company can deduct the rental payments as ordinary and necessary business expenses, the rental income is for Dr. Jones completely tax free.

Get professional guidance for any tax strategy.

The Augusta rule provides physicians and medical business owners an exceptional opportunity to reduce their taxable income.

If you rent out your home for up to 14 days a year, you can generate significant tax-free income. However, it is important to plan carefully and comply with local laws.

If you have questions about whether your property qualifies or how to document the transaction, consult a tax advisor. They can help you maximize your tax savings and use your real estate strategically.

Alexis E. Gallati is a tax strategist.