07/16/2025
DEBUNKING THE "AUGUSTA RULE"
I cannot tell you how many clients have seen this rule mentioned on TikTok or from some YouTuber who thinks they are really clever at discovering this "amazing loophole".
While "14 days of tax-free rent" sounds freaking amazing on it's face, it's really not as good as most people think.
I will first give you two relevant IRS code sections and then I'll debunk this myth that has everyone all atwitter!!
IRS Code §280A(g) - The Augusta Rule is a tax provision that allows homeowners to rent out their homes for up to 14 days in a calendar year and not report the rental income.
IRS Code §162(a) - There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.
Here's a brief history of the Augusta Rule:
The rule gets its nickname from homeowners in Augusta, Georgia, who would rent out their homes during the annual Masters golf tournament. As the Masters gained prestige, more and more residents capitalized on the demand by renting their properties for short periods, often for significant amounts.
These homeowners were subject to tax obligations on their rental income. Feeling that this was unfair for casual, short-term rentals, local lawmakers and residents lobbied Congress for a tax exemption.
In response to these efforts, Congress enacted Section 280A as part of the Tax Reform Act of 1976. This section included subsection (g), which specifically created the 14-day exclusion, allowing homeowners to exclude rental income from their taxable income if the dwelling was rented for less than 15 days in a year.
So, then, as TikToker's indicate, and as my clients ask me, "So, I should be able to rent my home to my corporation for my monthly shareholder meeting (my wife and I) for $10,000 for the year!! My corporation deducts it and I don't report the income! Yes! I want you do this for me every year!!"
The answer is "Absolutely NOT". This doesn't work like this for several reasons which I will explain below.
First thing is the reference up above to IRC §162 which is how ALL businesses take business deductions. Go read it again and pay attention to two VERY intentional and VERY important words; Ordinary and Necessary.
To take ANY deduction in your business, the deduction has to be both Ordinary AND Necessary. For example...driving for business is both Ordinary AND Necessary, which is why it's allowed as a deduction. But, is owning a Ferrari for business deductible? Hopefully this extreme illustration shows you that, for most businesses, owning a Ferrari is neither Ordinary NOR is it Necessary. With me so far?
So, bringing that concept into the current topic, it can easily seen that in a husband and wife Corporation, it is NOT NECESSARY to rent their own home for a monthly corporate meeting. Thus, it fails §162 and we don't even need to discuss if it's Ordinary.
Now...if you were a corporation with a REAL Board of Directors of outside, unrelated parties, the analysis would likely be different...but that is not what most of my clients have.
But...let's pretend, for a second, that we COULD justify it under §162 so I can illustrate the second reason the question above fails.
You can't just willy-nilly pick a rental figure out of your ass and deduct it. I am sure you've heard of FMV or Fair Market Value, right?
So, if your house in your neighborhood would rent for $2,500, and you can easily look up the Rent Zestimate on Zillow for a rough guideline, then how can you justify $10,000 in rent for 14 days? YOU CAN'T. It would be more like $1,167 or so.
So...even if this strategy WOULD work for a husband/wife corporation or SMLLC, the amount of rent is so low that taking this risk on your taxes would only likely save you less than $300 in tax.
Not worth the risk, is it?
