WEEKLY SWAP CLIENT COMMUNICATION

THE AUGUSTA RULE

Dear Client:

Normally, rental income is just like any other income, and you are required to pay income taxes on the income.  But a little-known loophole in the tax law completely excludes certain amounts of rental income from your income taxes.  IRC 280A(g), or the 14 day rule allows homeowners to rent out their home.  And you don’t have to worry about reporting the income on your tax return, either, since it is tax-free.

In this article, you will learn the simple requirements for this tax loophole, and how to easily handle the (very few) wrinkles that could complicate it.

Requirements:

1. You can rent out your primary home, a secondary home or a vacation home.

2. Expenses related to the rental of these properties are not deductible.

3. You have to rent out the home for less than 15 days (i.e. up to 14 days).

4. The 14 day rule is cumulative and doesn’t have to be consecutive.  For instance, you could rent out the house one day per month and still be under the 14 day limit.

5. The rental price must be reasonable for that location, type of house and date of rental. 

Business Owners Can Use 280 For Their Homes:

Under 280, a business owner can rent their personal home for business meeting to their own business.  Businesses need meeting space for board meetings, strategic planning meetings, shareholder meetings, etc.  If a businessowner choses, to use their home for business meetings, their business can rent the home and the owner doesn’t have to include the rent in their income.  However, the business does get a deduction for the rent.

The requirements are as follows:

1. It is very important to establish a market value for the rent paid.  An easy source for that would be VRBO or Airbnb listings that are of similar size, location and around the approximate date that the event takes place.

2. All expenses deductible by businesses have to be ordinary and necessary, so the owner will have to establish and document the purpose of the meeting, those in attendance, etc.

THE AUGUSTA RULE

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3. I will be important to establish a contract between the business and the owner that specifies the details, dates, requirements, etc.

4. Only the cost of the rental of the residence can be used.  For instance, if there is food or equipment to be furnished, they should not be included in the agreement and the business should pay for those things separately.

Once this is done, the business can deduct the cost of the rental and the owner does not have to report the income!!

If you have any questions about the Agusta Rule, please do not hesitate to call us at 505-232-3275.

Sincerely,

Larry Filener, CPA

Southwest Accounting Pros, LLC