The Augusta Rule gets its name from the Master's Golf Tournament, where some members and residents of the area lobbied because they wanted to rent their homes to attendees of the tournament without engaging in taxable rental activities. Fortunately, today the IRS Augusta Rule applies nationwide, not just in Augusta, Georgia.
This rule applies to any taxpayer who owns a home in the United States, and their home is not their primary place of business. If you fit this criteria, you can use the Augusta Rule to shift income away from your business, without incurring any tax penalties. Ultimately, this can be a very effective strategy for reducing your overall tax burden.
IRC Section 280A(g), also known as the Augusta rule, states: “...if a dwelling unit is used during the taxable year by the taxpayer as a residence and such dwelling unit is actually rented for less than 15 days during the taxable year, then—
the income derived from such use for the taxable year shall not be included in the gross income of such taxpayer under section 61, and
no deduction otherwise allowable under this chapter because of the rental use of such dwelling unit shall be allowed.
It is essentially an easy way to generate tax-free rental income that does not need to be reported on your individual tax return.
Here’s an example: John rents his home at $3,000 a day for 14 days. By applying the Augusta rule, he qualifies for no rental deductions. However, he gets to exclude the rent received, $42,000 ($3,000 x 14) from his taxable income that tax year.