Overview
IRC Section 280A allows homeowners to rent their residence for up to 14 days annually without reporting rental income. When residence is rented to taxpayer's business at fair market rate, business deducts expense while homeowner receives tax-free income.
Strategy requires legitimate business purpose, fair market rental rate, and strict compliance with 14-day limitation.
Requirements
Legitimate Business Purpose
Rental must serve genuine business purpose (board meetings, client events, planning sessions). Personal use or sham transactions disqualify strategy.
Fair Market Rate
Rental rate must reflect fair market value for comparable event space in local area. Inflated rates may be challenged upon audit.
14-Day Limitation
Strict 14-day annual limitation. Exceeding limitation requires reporting all rental income and disallows exclusion.
Tax Benefits
Example: Business pays $10,000 to rent owner's residence for two board meetings. Business deducts $10,000 as ordinary expense. Homeowner receives $10,000 tax-free (not reported as income).
Effective tax arbitrage: business reduces taxable income by $10,000 while owner receives equivalent amount tax-free, creating net tax savings at owner's marginal rate.
No depreciation recapture or rental activity reporting required due to 14-day limitation.
Implementation
Rental Agreement
Execute written rental agreement between business entity and homeowner documenting rental rate, dates, and business purpose.
Fair Market Rate Documentation
Research comparable event space rental rates in local area. Document rate determination methodology and comparable venues.
Business Purpose Records
Maintain meeting agendas, attendee lists, and business records documenting legitimate business purpose for each rental day. Coordinate with CPA for proper tax reporting.
Important Considerations
Augusta Rule frequently targeted in audits. Inadequate documentation or artificially high rates may result in disallowed deductions and potential penalties.
Business purpose must be genuine. Personal events or family gatherings disguised as business meetings will not withstand IRS scrutiny.
Fair market rate determination critical. Compare rates to similar event venues in local area, not residential property rental rates.
Coordinate with your CPA to determine appropriate rental rate, document business purpose, and evaluate audit risk for your specific situation.
Discuss Implementation
Contact us to evaluate Augusta Rule implementation for your business.