There aren’t many opportunities for people to receive tax-free income. But, if you’re a business owner, you can rent out your primary address, a secondary home, or even your boat and get a tax deduction, plus tax-free income.
Augusta, Ga., is home of the Masters tournament, one of the four major championships in professional golf. About 200,000 people live in Augusta.
During the Masters, about 40,000 to 50,000 patrons per day visit the city, according to Golf Digest. That’s roughly the entirety of Pittsfield moving to Worcester for the better part of a week.
For owners of Airbnbs and restaurants in Augusta, this is fantastic. But, if you are an ordinary resident, that week can be annoying.
The squeaky wheel gets the grease, they say. And born from the squeaks of annoyed townies was the Augusta Rule. The residents wanted to get out of the area during that period and were angry that they had to. Lawmakers created a compromise, and that compromise became national in scope.
The Augusta Rule allows homeowners to rent their house for up to two weeks per year, federally tax free.
Because the Augusta Rule became national, there’s no need for the rule to be tied to the Masters or any sporting event. And if you’re a business owner, I have a way for you to double dip and get preferential tax treatment.
Let me be clear, this is a legitimate tax-savings opportunity, unlike some other tactics I’ve seen some small-business owners use.
For example, small-business owners sometimes lease their personal car and run the cost through the business. With a wink and a nod, they’re writing off the entire lease cost, even though the IRS only allows you to deduct the part of each lease payment that is for business use.
There’s the guy that goes to the Las Vegas conference but stays a few extra days on the company dime. Or the person who uses company money to pay for their $1,500 iPhone and its subscription plan, even though half of it is for personal use. Or the owner who whips out the company card after dinner at that fancy restaurant and exclaims, “We talked about business, right?”
I can list a dozen other examples, but you know what I’m talking about.
If you do any of these, I’m not judging you. I’m just saying, this isn’t one of those things.
The Augusta Rule is a legitimate tax strategy. The Augusta Rule is known to the IRS as Section 280A. Whether you are a business owner or not, you still report the rental money you take in on Schedule E, which is for passive income.
The trick here is that your company can rent the dwelling from you, the individual. The business gets a tax deduction, and the owner reports the nontaxable income on Form 1040.
Amy owns a cosmetics store, and her primary residence is in Great Barrington. She also owns a cabin in Lake George, N.Y.
Amy uses the cabin frequently through the summer, but not as much in the offseason.
Seven times a year, she lets some of her employees take the cabin for a weekend for team-building exercises and a Zoom-free 48 hours to focus on important projects. That’s 14 days of tax savings and productivity.
Each of those seven times, the cosmetics company pays Amy’s personal account $2,000 to rent the cabin. The company sends Amy a Form 1099. The Augusta Rule says Amy does not have to pay taxes on that $14,000 of personal income. At the same time, the company is allowed to offset $14,000 of revenue.
Assuming Amy continues working and using this strategy for 15 years (until she’s ready to retire), that’s $210,000 of tax-free income.
So long as the property is being used for business purposes, the structure doesn’t have to be like that. Your company can also rent your residence for board meetings, client events, employee training, networking, etc.
Like Joe, you can rent out your primary home for off-site strategy meetings.
Joe lives in Pittsfield and has several retail stores in the Berkshires. Joe consults with his business adviser twice per month to plan expansion and growth.
When he’s at the office, everyone needs a piece of Joe and his time. To focus on what’s essential, Joe’s company rents out his home for $795 per month, and Joe’s company deducts that $795.
Joe’s business adviser doesn’t charge him too much more than that amount, so, Joe essentially ends up building his business for free.
Like any tax strategy, the use of the rental property should be documented, and the adviser provides this for the IRS.
You have flexibility, but there are restrictions. You could also rent your property for 14 days consecutively, but either way, be sure not to exceed that many days.
This is not a tax-saving tool for C-corporations or sole proprietorships. You should charge your business a market rate. The house you rent out can’t be your primary place of business, and rental-related expense are not deductible.
Those are lenient restrictions for the chance to receive hundreds of thousands of dollars in tax-free income.
Allen Harris is the owner of Berkshire Money Management and 10,001 Hours in Dalton, MA. He can be reached at firstname.lastname@example.org.
This article originally appeared in The Berkshire Eagle on August 14, 2021.