Latest / Well Advised Wealth / Rent Your Own Home Tax-Free for 14 Days a Year | Financial Advisor Explains The Augusta Rule

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Rent Your Own Home Tax-Free for 14 Days a Year | Financial Advisor Explains The Augusta Rule · Well Advised Wealth

• 0:00
  SPEAKER_01: The Augusta rule is real.
• 0:01
  SPEAKER_01: It's legal, and the IRS has never successfully challenged the basic version of it.
• 0:06
  SPEAKER_01: This is genuinely a completely tax-free income.
• 0:08
  SPEAKER_01: If you already own a home you live in, you already qualify.
• 0:12
  SPEAKER_01: If you're a business owner, you need to listen and consider the This part is what matters most.
• 0:18
  SPEAKER_01: This is where people get tripped up on the business side.
• 0:22
  SPEAKER_01: Welcome in, everybody.
• 0:24
  SPEAKER_01: I am Justin Chastain, the host and certified financial planner of the Well Advised Wealth Podcast.
• 0:31
  SPEAKER_01: And every week I help successful business owners and families create wealth that last.
• 0:37
  SPEAKER_01: Now, for those of you that tune in via YouTube and you're watching the screen here, you probably see me in a different shirt.
• 0:45
  SPEAKER_01: There's probably a green that resonates.
• 0:47
  SPEAKER_01: It's not just any kind of green.
• 0:49
  SPEAKER_01: I think it's even been trademarked.
• 0:50
  SPEAKER_01: And it has a little yellow logo of America with a golf flag in it, right?
• 0:56
  SPEAKER_01: Because why else other than but America, right?
• 0:59
  SPEAKER_01: When you hear this accent, America.
• 1:01
  SPEAKER_01: But it's a master shirt.
• 1:03
  SPEAKER_01: And no, it's not April.
• 1:04
  SPEAKER_01: I've not lost my mind.
• 1:06
  SPEAKER_01: But every April, homeowners in Augusta, Georgia rent out their houses to people in town for the Masters Golf Tournament.
• 1:13
  SPEAKER_01: A modest three-bedroom house can pull in five figures for one week completely tax-free.
• 1:19
  SPEAKER_01: None of those homeowners run a business through that transaction.
• 1:22
  SPEAKER_01: They're just people who own a house, renting it to a stranger for a week.
• 1:26
  SPEAKER_01: Yeah, that sounds a little creepy, right?
• 1:28
  SPEAKER_01: But think about it as Uber for real property.
• 1:32
  SPEAKER_01: Not Uber, Uber, I think is how most people pronounce it.
• 1:36
  SPEAKER_01: But in the South, we do not allow diction to get in the way of good conversation.
• 1:40
  SPEAKER_01: But that tax-free opportunity there is not a typo.
• 1:43
  SPEAKER_01: It's not a rumor.
• 1:44
  SPEAKER_01: It's an actual line in the tax code, and it works the same whether you own a business or not.
• 1:49
  SPEAKER_01: It's nicknamed the Augusta rule.
• 1:51
  SPEAKER_01: And today I'm going to talk about the good, the bad, and the ugly of it, including what happens if you own your home or own more than one home and a real tax court case that exactly shows what goes wrong when somebody pushes it too far.
• 2:05
  SPEAKER_01: So let's get into it.
• 2:07
  SPEAKER_01: So why does this matter?
• 2:08
  SPEAKER_01: Well, I ultimately want to give you a little bit of history around this, but this strategy doesn't care what you do for a living.
• 2:15
  SPEAKER_01: If you own a home and you actually live in it for any part of the year, you already qualify for the Augusta rule.
• 2:22
  SPEAKER_01: You don't need a business, an LLC, or a fancy structure.
• 2:25
  SPEAKER_01: You just need a home, and for fewer than 15 days a year, someone must be willing to pay you to rent it.
• 2:31
  SPEAKER_01: And that income is completely tax-free.
• 2:35
  SPEAKER_01: Full stop, and guess what?
• 2:37
  SPEAKER_01: It's been sitting in the tax code since 1976.
• 2:42
  SPEAKER_01: You know, there's a lot of great things that came out of 1976.
• 2:46
  SPEAKER_01: A bicentennial party, some really cool Ford Pentos, right?
• 2:50
  SPEAKER_01: That's a long time to be sitting in a tax system.
• 2:53
  SPEAKER_01: And as I tell clients all the time, when we do tax planning, you don't hate the game or the player.
• 3:01
  SPEAKER_01: You just have to learn how to play in the system.
• 3:04
  SPEAKER_01: Here's a system we can learn to leverage.
• 3:07
  SPEAKER_01: Here we go.
• 3:08
  SPEAKER_01: Here's why I wanted to tell you about this now.
• 3:10
  SPEAKER_01: Not because I want to wait to April.
• 3:12
  SPEAKER_01: Everybody's doing this.
• 3:14
  SPEAKER_01: But this strategy gets talked about constantly online.
• 3:17
  SPEAKER_01: And usually by somebody promising you a free, tax-free money with a slide, a countdown timer, and a course that you can buy for$999.
• 3:28
  SPEAKER_01: Sounds a little like Billy Mays, but without the oxyclean.
• 3:31
  SPEAKER_01: And not only do you leave feeling dirty, your clothes aren't any cleaner either.
• 3:36
  SPEAKER_01: And usually this is framed as if you need a business owner with a fancy S Corp to touch it.
• 3:42
  SPEAKER_01: Exactly the kind of noise this show exists to cut through.
• 3:46
  SPEAKER_01: The Augusta rule is real, it's legal, and the IRS has never successfully challenged the basic version of it.
• 3:53
  SPEAKER_01: Where people get into real trouble is a specific, more aggressive use of the same rule.
• 3:58
  SPEAKER_01: Business owner renting to their own company and done correctly is doing a lot of work in that version can do this properly, but we're going to cover both today on the business owner side or just the individual personal home ownership side because the simple version anyone can use, and the business owner version that can go sideways if you're not careful.
• 4:21
  SPEAKER_01: So here's a quick sense of the scale for the simple version.
• 4:24
  SPEAKER_01: Say you rent your home for a week during a big local event.
• 4:28
  SPEAKER_01: It doesn't have to be a golf tournament, but it could.
• 4:31
  SPEAKER_01: It could be a festival, a conference in your city, and comparable short-term rentals nearby are going for three to five hundred dollars a night.
• 4:39
  SPEAKER_01: That's$2,000 to$3,500 of completely tax-free income.
• 4:44
  SPEAKER_01: No LLC required, no business purpose to document, just a homeowner renting a house the same way the Augusta homeowners do every April.
• 4:52
  SPEAKER_01: You just have to be really comfortable with letting a stranger in your home.
• 4:56
  SPEAKER_01: For business owners specifically, the number is usually smaller per use, but repeatable and double dipping.
• 5:03
  SPEAKER_01: This is money you've paid yourself anyway, but you're just moving from the business to you with tax and no tax on either side of the ledger, if done correctly.
• 5:14
  SPEAKER_01: So here's the history of it.
• 5:16
  SPEAKER_01: Let's strip away the nickname, and I'm going to give you a very technical term that you don't really need to remember.
• 5:22
  SPEAKER_01: But the IRS section code is called a 280A small g.
• 5:27
  SPEAKER_01: And this provision is buried in a section of tax code that mostly exists to stop people from abusing their vacation home rentals.
• 5:36
  SPEAKER_01: Section 280A, as a whole, was written in the Tax Reform Act of 1976 to police exactly the kind of abuse from rental properties.
• 5:46
  SPEAKER_01: But tucked inside it is a narrow exception.
• 5:49
  SPEAKER_01: And that exception is exactly what we're talking about today.
• 5:52
  SPEAKER_01: Here's what it actually says.
• 5:54
  SPEAKER_01: If you use a home as your residence and you rent it out for fewer than 15 days during the year, none of that rental income counts as taxable income.
• 6:03
  SPEAKER_01: Now think about this.
• 6:04
  SPEAKER_01: That's not reduced, that's not deferred, excluded entirely, and no rental deductions are allowed against it either, because the law treats the whole transaction as it never generated taxable activity in the first place.
• 6:19
  SPEAKER_01: Now, notice what the statute does not say.
• 6:22
  SPEAKER_01: It says nothing about who's paying the rent.
• 6:25
  SPEAKER_01: If you own your home and you rent it out for fewer than 15 days a year to anyone, a family in town for a wedding, a film crew, a corporate group for overflow lodging, like a conference, a stranger during a big local event, that income is excluded from your taxes under Section 280AG.
• 6:45
  SPEAKER_01: Whether or not you own a business at all.
• 6:48
  SPEAKER_01: That whole strategy for most people listening to this, okay, that is the entire strategy.
• 6:55
  SPEAKER_01: No entity, no paperwork beyond good records, no business purpose required.
• 7:00
  SPEAKER_01: If you own more than one home, and here is something people misunderstand.
• 7:05
  SPEAKER_01: If you have more than one residence, the 14-day allowance applies separately to each home you personally use as a residence, not one combined limit across everything you own.
• 7:16
  SPEAKER_01: A primary residence, a lake house, you actually spend time in each on their own, okay?
• 7:23
  SPEAKER_01: Again, you're going to get 14 days per home.
• 7:26
  SPEAKER_01: The catch is that each property has to genuinely qualify as a residence to you.
• 7:31
  SPEAKER_01: The tax code's test is that your personal use has to exceed the greater of 14 days a year or 10% of the days it's rented at fair value.
• 7:42
  SPEAKER_01: A property you never actually stay in yourself or held purely as a rental does not qualify.
• 7:48
  SPEAKER_01: It is under normal rental property rules instead.
• 7:53
  SPEAKER_01: Now, here's why the business owner specifically can get more out of the same rule.
• 7:57
  SPEAKER_01: If they wanted to, instead of renting to a stranger, your business rents your personal home for a legitimate business purpose.
• 8:05
  SPEAKER_01: A board meeting, a strategic planning off-site, an annual retreat with your leadership team.
• 8:10
  SPEAKER_01: The business pays you a rent at a fair defensible rate, deducts it as an ordinary business expense, and you personally exclude that same rent from your income completely.
• 8:22
  SPEAKER_01: Exactly the Gusta Rule homeowner does with the golf fan's money.
• 8:25
  SPEAKER_01: The difference is that a business owner gets a deduction on one side of the transaction and an exclusion on the other, doubling the benefit.
• 8:33
  SPEAKER_01: A stranger renting your house for a master's doesn't get you a business deduction, but it does get you a tax-free rent.
• 8:39
  SPEAKER_01: That extra layer is powerful, but it's also where nearly all of the real risk in this strategy lives, and it's exactly what the rest of this episode is about.
• 8:48
  SPEAKER_01: Let's get into the good and the bad and the ugly.
• 8:51
  SPEAKER_01: Number one, on the good.
• 8:52
  SPEAKER_01: This is genuinely a completely tax-free income.
• 8:55
  SPEAKER_01: One of the only places in the entire tax code where that's true for anyone.
• 9:00
  SPEAKER_01: This is not a deduction that lowers your taxable income.
• 9:03
  SPEAKER_01: It is not a deferral that pushes the tax bill down the road a year later or years later, and where we might use this in a lower tax bracket.
• 9:11
  SPEAKER_01: Zero income tax, zero self-employment tax, and it never shows up on Schedule E or touches your adjusted gross income.
• 9:19
  SPEAKER_01: This applies the same way whether you're renting to a stranger for a local event, to your own company for a board meeting.
• 9:25
  SPEAKER_01: Number two, the basic version almost uh nothing to use.
• 9:31
  SPEAKER_01: In the basic version on the personal side, no LLC, no S Corps, no business at all.
• 9:36
  SPEAKER_01: If you already own a home you live in, you already qualify.
• 9:40
  SPEAKER_01: Retirees, W-2 employees, anyone.
• 9:42
  SPEAKER_01: If there is a reason someone should pay to stay in your house for a few days a year, that income is yours tax-free.
• 9:48
  SPEAKER_01: The same way it has been for tax-free and Augusta homeowners for decades since 1976.
• 9:54
  SPEAKER_01: If you own more than one qualifying home, you get this allowance for each property separately.
• 10:00
  SPEAKER_01: A primary residence and a second home, you genuinely have to live in, and you each use, carry their own 14 days.
• 10:07
  SPEAKER_01: That's not a loophole.
• 10:08
  SPEAKER_01: That's built into how the statute's written.
• 10:11
  SPEAKER_01: Since the exclusion applies per dwelling unit, not per taxpayer.
• 10:15
  SPEAKER_01: Number four, business owners get a second layer on top of this.
• 10:18
  SPEAKER_01: If you do own a legitimate business and renting your home to it for genuine business purposes, it adds a deduction to the business side.
• 10:26
  SPEAKER_01: But to the personal side, you're getting an exclusion.
• 10:28
  SPEAKER_01: You're doubling the benefit compared to renting just to an unrelated stranger.
• 10:32
  SPEAKER_01: It's a real bonus.
• 10:33
  SPEAKER_01: The whole strategy, and it's not required to get any of the first three points.
• 10:38
  SPEAKER_01: Now, that all sounds great, but what's the bad?
• 10:42
  SPEAKER_01: Well, there's a 14-day limit.
• 10:43
  SPEAKER_01: That's not a cliff, not a slope, and this one applies to everyone.
• 10:46
  SPEAKER_01: It's not the first 14 days are tax free, and the 15th just gets the tax normally.
• 10:52
  SPEAKER_01: One day over the limit, and the entire year's rental income for that home becomes reportable.
• 10:57
  SPEAKER_01: All of it.
• 10:58
  SPEAKER_01: Not just the extra day.
• 11:00
  SPEAKER_01: There is no partial credit, so you must track your rental days like your tax return depends on it because it does.
• 11:07
  SPEAKER_01: Number two on the bad.
• 11:08
  SPEAKER_01: Everything else in this section is really about the business owner version.
• 11:12
  SPEAKER_01: So if you're just renting to a stranger, most of this is not going to apply to you.
• 11:16
  SPEAKER_01: But at an arm's length, a renter paying real market rent is, by definition, paying you a fair rate.
• 11:22
  SPEAKER_01: There's no related party to question to defend.
• 11:25
  SPEAKER_01: The complications below only show up once you're renting to your own company because that's a related party transaction the IRS looks at differently.
• 11:33
  SPEAKER_01: Number three, for business owner versions specifically, you need an actual separate business entity.
• 11:39
  SPEAKER_01: So let's think about this.
• 11:40
  SPEAKER_01: A sole proprietor, they're out.
• 11:42
  SPEAKER_01: Default single member LLC, you're out too.
• 11:45
  SPEAKER_01: If you have not formalized your business into an S or C core or a partnership or an elected S Court treatment for a single member LLC, the double dip version simply isn't available to you yet.
• 11:57
  SPEAKER_01: No matter how you legitimize your home office meetings are or how you document everything, you're out.
• 12:05
  SPEAKER_01: The simple version from good number two is fully available to you either way, though.
• 12:10
  SPEAKER_01: You're just not going to get the business deduction.
• 12:12
  SPEAKER_01: You do get the tax-free personal opportunity.
• 12:15
  SPEAKER_01: Number four, also specific to the business owner version.
• 12:18
  SPEAKER_01: The rent has to be real, defensible, and fair market value.
• 12:21
  SPEAKER_01: Not just a number you pick arbitrarily because it sounded good.
• 12:24
  SPEAKER_01: This sounds simple, but it's not.
• 12:26
  SPEAKER_01: It's not simple in practice, and it's exactly where the next section comes from.
• 12:31
  SPEAKER_01: So let's get into the ugly, and I'm actually going to reference a real case.
• 12:35
  SPEAKER_01: Now, everything in this section is about the business owner, the related party version of this strategy, not the simple version most listeners probably will actually use.
• 12:45
  SPEAKER_01: If you're just renting your home to an unrelated third party, skip ahead to the weekly wealth minute with a clear conscience.
• 12:52
  SPEAKER_01: But if you're a business owner, you need to listen and consider the double dip version.
• 12:56
  SPEAKER_01: This part is what matters most.
• 12:58
  SPEAKER_01: This is where people get tripped up on the business side.
• 13:01
  SPEAKER_01: Number one, on the ugly.
• 13:02
  SPEAKER_01: Here's what actually happens when you get the rate wrong.
• 13:04
  SPEAKER_01: Here's a real case, it's not hypothetical.
• 13:06
  SPEAKER_01: Sinopoly versus the commissioner.
• 13:08
  SPEAKER_01: This company decided, and the tax court actually ruled on this.
• 13:12
  SPEAKER_01: In 2023, there were three co-owners of an escort, and they franchised some Planet Fitness Gyms, but they had their company pay them$290,000 over about three years to rent portions of their homes for monthly meetings.
• 13:26
  SPEAKER_01: To set the rate, they used a commercial meeting space rate of roughly$1.83 per square foot applied to their own home.
• 13:33
  SPEAKER_01: There was no appraisal, no comparable home rental data in that area.
• 13:37
  SPEAKER_01: The IRS challenged it, and the tax court agreed that the rate was unreasonable.
• 13:41
  SPEAKER_01: Setting fair rent at$500 per meeting and calling that number was generous.
• 13:45
  SPEAKER_01: Meetings nobody could actually prove happened to get disallowed completely because no matter what the rate was, they didn't have proof of the meetings occurring.
• 13:54
  SPEAKER_01: So out of that$290,000 claim, the court allowed for$16,500.
• 13:59
  SPEAKER_01: And the court did not mince words about any of it.
• 14:02
  SPEAKER_01: It also said in the arraignment that the petitioners had adopted a tax savings scheme to distribute the company's earnings to petitioners through purported rent payments.
• 14:11
  SPEAKER_01: That is a no-go.
• 14:12
  SPEAKER_01: So for instance, most of the listeners get totally shocked when they realize that I'm not from New York.
• 14:18
  SPEAKER_01: They like, your accent sounds a little northeastern.
• 14:21
  SPEAKER_01: But believe it or not, I'm from the Southeast.
• 14:23
  SPEAKER_01: I could not use a Manhattan rent space to justify the Augusta rule and use my home as that rental space.
• 14:32
  SPEAKER_01: It has to be reasonable where I live, and an appraisable would be nice.
• 14:37
  SPEAKER_01: Here's the other thing, number two for the ugly.
• 14:39
  SPEAKER_01: Here's the fix, and it's not complicated.
• 14:41
  SPEAKER_01: You must track your rental days on a calendar and stay at 14 or fewer.
• 14:46
  SPEAKER_01: No exceptions, no rounding up.
• 14:48
  SPEAKER_01: Price the rent using a real comparable rate in your area for the space you're using, a meeting venue, an event space, a corporate off-site location, again, in your area code, not a generic commercial space based across the country or some square footage number pulled out of, well, you know what, this is a family show.
• 15:07
  SPEAKER_01: Also, get a rent-and-rental agreement in place before the event happens, not afterwards, because again, if you plan for the event after it occurred, that means that you just made something up.
• 15:17
  SPEAKER_01: The document needs to have some level of agenda, minutes, and who attended, just like you would document any legitimate business meeting.
• 15:25
  SPEAKER_01: Make sure you do this proactively.
• 15:28
  SPEAKER_01: Also, keep a clean proof of payment, a bank transfer, a check so that there's a paper trail showing the money actually moved.
• 15:36
  SPEAKER_01: Number three, under the ugly, is the reality is the internet sells the business version of this as a magic trick and the IRS treats it as a related party transaction that gets real scrutiny.
• 15:47
  SPEAKER_01: Every dollar of this strategy is legal, but legal and unquestioned are different things when the payment is going from your business to you personally.
• 15:54
  SPEAKER_01: Just like in this Synopoly case, the case isn't proof the Augusta rule doesn't work.
• 15:59
  SPEAKER_01: The court didn't say the strategy was invalid.
• 16:01
  SPEAKER_01: What the court said was it didn't touch the simple version at all.
• 16:05
  SPEAKER_01: It's proof that sloppy pricing and thin documentation are exactly what turns a legitimate strategy into an expensive lesson.
• 16:13
  SPEAKER_01: Specifically in a related party version.
• 16:16
  SPEAKER_01: So what do we do about it?
• 16:18
  SPEAKER_01: Well, if you're just using the simple version and you're renting your home to someone who isn't in your own business or you don't own your own business, number one, track your rental days on a calendar and stay at 14 or fewer for each qualifying home you own.
• 16:32
  SPEAKER_01: That's most of the work right there.
• 16:34
  SPEAKER_01: Number two, keep basic proof of the rental that happened.
• 16:38
  SPEAKER_01: A simple agreement, a proof of payment.
• 16:40
  SPEAKER_01: You're not building an audit defense file here.
• 16:43
  SPEAKER_01: You're just keeping honest records.
• 16:44
  SPEAKER_01: And number three, if you own more than one home, confirm each one genuinely qualifies as a resident you use.
• 16:51
  SPEAKER_01: It cannot be a pure rental.
• 16:52
  SPEAKER_01: And before assuming you get a separate 14 days on it, you need to always make sure this is not a pure rental.
• 16:59
  SPEAKER_01: If you are a business owner and you want the double dip version, well, number one, you need to confirm you actually have the right entity.
• 17:06
  SPEAKER_01: If you're a sole proprietor or a default single member LLC, this version isn't available to you for a business deduction.
• 17:13
  SPEAKER_01: Talk to your CPA about whether the S Corps or another election makes sense before you try this.
• 17:18
  SPEAKER_01: And as I always say, we don't do everything just for tax strategy.
• 17:22
  SPEAKER_01: That might not make sense for you at all to change your entity type just to get a deduction for the Augusta rule.
• 17:28
  SPEAKER_01: So don't do that at all.
• 17:30
  SPEAKER_01: Talk to your CPA or fiduciary.
• 17:32
  SPEAKER_01: Number two, set a real business purpose and put it on the calendar before the rental day happens.
• 17:37
  SPEAKER_01: Then get comparable rates from actual meeting or event spaces in your area.
• 17:41
  SPEAKER_01: Get this in writing before you set the rent and not a generic commercial rate pulled from, well, again, you know where.
• 17:47
  SPEAKER_01: And thirdly, document each meeting that it actually happened.
• 17:50
  SPEAKER_01: Have agenda, short set of minutes, who was there, and keep paper trails as well.
• 17:55
  SPEAKER_01: So now for our weekly wealth minute.
• 17:58
  SPEAKER_01: If you remember one thing from today, you do not have to own a business to use the Augusta rule.
• 18:03
  SPEAKER_01: If you own a home you live in and you already qualify for tax-free rental income up to 14 days a year, the same as any homeowner near a stadium or a golf course during a big event.
• 18:15
  SPEAKER_01: If you're a business owner, you get an extra layer on top of that if they want, but that extra layer is also where the audit risk lives.
• 18:23
  SPEAKER_01: So it's worth a real conversation with your financial planner, tax planner, CPA before you do the double dip version, not after.
• 18:33
  SPEAKER_01: I tell clients this all the time.
• 18:35
  SPEAKER_01: Be proactive.
• 18:37
  SPEAKER_01: So check this this week with your planners, current planners, or if you're not using one, this is somewhere you definitely need to incorporate them on your board of directors to ask before you make any implementations to your tax strategy.
• 18:51
  SPEAKER_01: So let's wrap this up like a cheap gas station sandwich.
• 18:55
  SPEAKER_01: For the exact language and even more on the Synopoly case and how that played out, check the show notes.
• 19:00
  SPEAKER_01: Just remember if your board meeting last spring was really just a way to gather everyone around a pool eating tacos and some coronas, and if you're really bougie, some bush light, that's fine.
• 19:11
  SPEAKER_01: But next time you might want an actual agenda and confirm with your planner to see if you can take care of the Augusta rule with that.
• 19:18
  SPEAKER_01: But that would not be a reason to constitute the Augusta rule deduction at all.
• 19:23
  SPEAKER_01: And as I always say, see you next week.
• 19:26
  SPEAKER_01: But in the meantime, build wealth and live well.
• 19:39
  SPEAKER_00: More information about Parallel Financial can be found in Form ADV Part 2, which is available upon request.
• 19:47
  SPEAKER_00: This website is for informational purposes only and should not be construed as investment advice or a recommendation to buy or sell any security or other investment, or to undertake any investment strategy.
• 20:00
  SPEAKER_00: Opinions expressed herein are solely those of Parallel Financial LLC, unless otherwise specifically cited.
• 20:08
  SPEAKER_00: Material presented is believed to be from reliable sources, and no representations are made by our firm as to another party's informational accuracy or completeness.
• 20:18
  SPEAKER_00: All information or ideas provided should be discussed in detail with an advisor, accountant, or legal counsel prior to implementation.