Augusta Rule: How to Master this Tax Loophole

The Masters Tournament, held in Augusta, Georgia, is one of the most prestigious PGA golf tournaments. It’s so widely attended that people will rent out their own homes to tourists just for that week. In fact, a tax loophole was created in its honor. But, hey, you don't have to be an Augusta resident to take advantage of this rule.

What is the Augusta rule and who qualifies? 

The Augusta rule, also referred to as the Masters exemption or Masters exception allows homeowners to rent out their homes for up to 14 days and exclude that rental income from their taxable income. Though its namesake would imply it’s only applicable to residents of Augusta, it applies to any taxpayer who owns a home in the United States, as long as your home is not your primary place of business. The Augusta rule IRS exemption is fully documented in Section 280A(g) of the tax code.  

The section specific to the Augusta rule says: 

(g) Special rule for certain rental use 

Notwithstanding any other provision of this section or section 183, 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— 

(1) no deduction otherwise allowable under this chapter because of the rental use of such dwelling unit shall be allowed, and 

(2) the income derived from such use for the taxable year shall not be included in the gross income of such taxpayer under section 61. 

What’s the catch? 

Though the special rule is extremely useful, there are some things you need to know. 

The home must not be a full-time rental property. Fourteen. That's the allowable number of days per year you can rent the property out without having to pay any taxes on the income. The days don’t have to be consecutive. However, if you rent it for a 15th day, taxes are due for all the days. 

The amount of income is not capped, but the rental rate must be fair market value at the time of the rental. So, if you happen to live near major sporting events, you could earn thousands of dollars without having to pay a penny in tax.  

You can’t claim the expenses related to the rental. It makes sense that since you aren’t paying tax on the income, you can’t claim the expenses incurred as a result. 

What about local tax rules? 

Though the income is not subject to federal income taxes, your state and local government may require you to pay tax on the income. You may also have to pay a hotel or lodging tax. Airbnb has a lot of great info in their help center that can get you up to speed about local laws. For example, this page covers occupancy tax collection in Illinois, for instance. You should also check your state and local government websites for up-to-date information.  

The Augusta rule is just one of many strategies for minimizing your tax liability. We can help you navigate complex tax code. Click here to book a complimentary call with Kaizen CPAs + Advisors.