Transcription
Have you ever heard someone say, "Just rent your home to your business for 14 days and save thousands." Well, here's the real story. It's called the Augusta rule, and it is real, but only if you do it right. And today, I'll show you how to maximize this deduction legally.
And if you don't know me, I'm Jasmine Deluchcci. I'm a tax attorney, CPA, enrolled agent. I started studying tax law in high school. My day-to-day is actually running my CPA firm and my tax law firm. But I started posting on social media and created a free tax law community after a decade of practicing tax because real tax help with actual tax law should be available to everyone.
So, let's break it down. This is my three-part framework for using the Augusta rule so that you don't get destroyed in an IRS audit. And step one is understand what the Augusta rule actually says. It comes from IRC 280A(g) and it lets you exclude up to 14 days of rental income for your personal residence from gross income. And that is a fancy way of saying it's not taxable income. And the reason we have this rule is because people in Augusta, Georgia, who would rent their homes out during the Masters golf tournament and Congress in 1976 decided to create a tax-free carveout that would apply to this situation. The Augusta rule was intended to prevent tax on income when you rent your home for a handful of days to a third party. Okay? So, just like you can rent your home to a third party, you can also rent it to your own business for business use. Take the deduction on your business and exclude the income on your personal return as long as you execute it right. The catch, there is not one. Okay? It is a great deal, which is why you better keep great proof to protect it. And in my experience, the clients who come in already utilizing the strategy from a tax plan have nowhere near what is needed to safely take this deduction. Like in Jadav v. Commissioner, where the taxpayer paid $50,000 for a plan that included recommending the strategy in a way that didn't provide for proper implementation, so it was successfully reversed in full by the IRS.
So, step two, document real-time business purpose and support. And here's what you should keep in writing in real time if you want a strong deduction. A written real-time agreement signed in advance. Date and time of each meeting. The name of the attendees. Purpose of each meeting documented with real-time minutes. An invoice from the business to yourself personally and actually pay that invoice. And finally, collect a W9 and issue a 1099-NEC just like you would for a third party. You'll then report the income on your Schedule E and show an offset with the code section. And listen, there will be plenty of people that say, "No, you can just shortcut all of this." And you can, but that's exactly what puts you at risk. And here's why. The economic substance has high scrutiny because you are on both sides of the transaction. With a third party, the money trail speaks for itself. Nobody pays an unrelated party just for fun. But when it's you paying you, you have aligned economic incentives to reduce your tax bill, but you need to show that this was not done solely for tax purposes. So you want more and better support than you otherwise would with a third party to make it through an IRS audit.
Step three, set a reasonable rate. Okay, and this is where the IRS really focuses their time because people make the IRS's case so easy. Like in Janavi v. Commissioner. Remember the case I mentioned where the taxpayers paid 50 grand for a tax plan to tell them to execute the strategy among other strategies that were reversed in court as well. That plan estimated the tax savings from the Augusta rule based on the daily rate of $2,500 per meeting. The taxpayers proceeded to use that estimate as their actual rent payments with no proof that it was anywhere near fair market value. And not a surprise here, what happens? The IRS wins and the deduction is completely wiped out. We have a similar situation in Cinnipol v. Commissioner, but this case had a nicer auditor. The business deducted rent of $3,000 per meeting per taxpayer home, adding up to a $290,900 deduction across three years, but they had no support for the valuation and limited support for the meetings themselves. Tax court, of course, sided with the IRS. The meetings held were just a couple of people. Yet, the revenue agent allowed the taxpayers to use a $500 day rental rate based on a meeting space that holds 500 to 1,200 people. And this led the court to say, "While petitioners argue that the $500 rent determined by revenue agent Burgess was not reasonable, we disagree and find to the contrary that the $500 allowed is actually generous. Obviously, only small portions of the residences were used for the meetings when they occurred." And this tells me tax court would have been more than comfortable reducing the deduction even more. So, here's how to protect yourself and not just cross your fingers that you have a generous auditor. You want to pull comps in real time. And a comp would be you comparing your house to other similar homes or meeting rooms in the same area for the same amount of space given the business use and number of people attending. Remember, this deduction, like every deduction, places the burden of proof on you. The IRS does not need to prove that your chosen rate is not fair market value. The burden is on you to prove that it is fair market value.
So, final takeaways for how to use the Augusta rule safely. Okay. First, understand the law. IRC 280A(g) excludes rental income from tax, but only up to 14 days and only from personal residences. Two is prove the business purpose and keep real-time documentation. And I want to emphasize real-time because the IRS and tax court view your support as less credible and less reliable if it's created after the fact. And three, charge a reasonable rate with real-time support. Okay? Get comps and avoid inflating the value so much that you lose all credibility in an IRS audit that honestly can influence the auditor's view of the support you have for other deductions. So, used correctly, the Augusta rule can save you thousands of dollars per year in tax. Used incorrectly, it becomes an easy deduction to get the IRS to reverse with tax penalties and interest. And if you want more videos that explain actual tax law, not misleading half-truths that land you in my office with a tax bill, then join my free actual tax law community. And as always, subscribe for actual tax law from a tax attorney.