How to model the "Augusta Rule" in Scenario Analysis

Homeowners are eligible to exclude rental income derived from renting their primary or secondary homes for federal income tax purposes, provided that they rent the residence for 14 or fewer days per year. Technically, this is covered in IRS Section 280A(g). But this code provision is better known as the “Augusta Rule”, as the rule originated to help homeowners in Augusta, Georgia who rented out their homes on a short-term basis during the annual Master's golf tournament. 

While taxpayers make use of this rule to enjoy tax free income, that tax free nature means they are also not allowed to claim any deductions related to the rental (e.g., utilities, mortgage interest, maintenance, ect.). Additionally, the rent the taxpayer charges needs to be at fair market value and for legitimate use, so as to avoid abuse. 

While homeowners in popular destinations can make use of this provision - such as for sporting events in college towns or professional events such as the Masters - business owners could potentially make use of this provision to rent their homes to their businesses for meetings, conferences or other legitimate purposes, allowing for a deduction on the business return and tax free income on a personal return. (Note that a business must be an S-Corp, C-Corp or partnership to take advantage of this rule. Sole proprietors, Schedule C entities, or an LLC taxed as a Sole Proprietor are ineligible.) Taxpayers should keep meticulous records and documentation should they need to justify their use of this provision to the IRS. 

To illustrate the value of this provision, consider an example where a homeowner chooses to rent their home during the two week period when the Olympics are being held in their city. Market rates for a short-term rental in their town during peak season are $1,000/day, or $14,000 for a 14-day period. 

First, create a scenario illustrating this scenario as if that income was taxable. Rental income is typically reported on Schedule E, so enter the amount of rental income in that field:

Some users may choose to use Field Notes to include details related to the rental income. 

Next, copy this scenario as a new scenario, and either delete the amount of rental income in the Schedule E field or make a corresponding offset in the Field Notes of the new scenario:

Lastly, use the Comparison Tool in Scenario Analysis to illustrate the federal tax impact of excluding this income:

Expanding on this concept, consider a MFJ taxpayer who owns an S-corp that distributes $200,000/year as a profit distribution, with a salary of $100,000. Rather than hold quarterly company meetings onsite, the business owner chooses to hold those meetings at her home. Comparable rental income for the quarterly meetings is $5,000/day, or $20,000 for four meetings over the course of the year. 

Assuming the business owner properly documents the rental and demonstrates a legitimate business purposes (e.g., written rental agreements, meeting minutes, etc.), use of the Augusta Rule would allow for a $20,000 deduction on the S-corp tax return, reflecting a lower distribution on Schedule E and lower taxes. But the business owner would not have to claim the $20,000 of rental income on her personal tax return. 

One important factor to keep in mind is that while this income is excluded for federal income tax purposes, different states may have different interpretations. If your client lives in a state that does not have a similar exclusion for rental income, you will need to add this income back for state tax purposes