If you’ve ever thought about renting out your home briefly, the Augusta Rule might just be your next favorite tax deduction. Named after the famous Augusta National Golf Club, this little-known rule could help you pocket tax-free rental income.

So, let’s dig into what it is, how it works, and whether you can take advantage of it.

What is the Augusta Rule?

The Augusta Rule, formally known as Internal Revenue Code (IRC) Section 280A, allows homeowners to rent out their personal residence for up to 14 days a year without including the rental income in their taxable income. The catch? You can’t rent it out for more than 14 days per year or you’ll lose the tax-free perk. 

Who can benefit from the Augusta Rule?

Most homeowners can benefit from the Augusta Rule, but it’s a great fit for homeowners who only rent out their primary residence or vacation home occasionally—think a couple of weeks during peak season or around big events.

That’s where the rule came from: residents of Augusta, Georgia, who rent out their homes to attendees of the annual Masters golf tournament. It’s also popular among people who own homes near major events, festivals, or tourist attractions. 

But before you start counting your tax-free dollars, there are a few rules and restrictions to be aware of:

• Only available for U.S. properties. First, the Augusta Rule applies only to properties located in the United States, so you can’t use it for a vacation property in another country. 
• Not available for business property. Second, your home can’t be your primary place of business, so it generally doesn’t apply to Schedule C filers.
• You must charge reasonable rent. The rent you charge must be reasonable and in line with what the rental market supports. For example, if similar homes in the area rent for $200 per night, you can’t charge $1,000 per night and expect to pocket all of that profit tax-free.

How to calculate the deduction

Now that we know the basics, let’s talk about how you can actually take advantage of the Augusta Rule and figure out your tax-free income. The simplest method is to rent your vacation home through a short-term rental platform like Airbnb or Vrbo, which gives you an easy way to keep track of the number of days rented and the income generated.

How to calculate the fair rental value:

To qualify for the Augusta Rule, you need to charge what’s called “fair rental value.” This means that you should charge the same rate a stranger would pay for your property—no giving discounts to friends or family! Here are a couple of ways to calculate fair rental value:

1. Compare listings. One of the simplest methods is to check out comparable rentals in your area. What are similar properties charging per night? That will give you a good idea of what you should charge.
2. Use rental platforms. If you’re listing your home on Airbnb or a similar platform, they often suggest rental rates based on your location, size, and amenities. This is an easy way to ensure you’re not undervaluing (or overcharging) for your space.

For example, say you own a home near one of the locations for the next NCAA March Madness college basketball tournament. You’ll be on vacation that week, so you list the property on VRBO. Similar homes are available for $450 per night that week, so that’s the nightly rate you charge.

You rent out the home for an entire week, pocketing $3,150 (7 nights x $450 per night). Normally, if you were in the 32% tax bracket, you’d pay roughly $1,008 in taxes on that rental income. But since you rented the property for less than 14 days, it’s tax-free income.

Remember, the key is that this income remains tax-free as long as you don’t exceed 14 rental days per year. If you rent for 15 days or more, you’ll have to report all of the income—and that could mean a bit of a headache.

Why the Augusta Rule is useful

The Augusta Rule is particularly handy if you have a second home that you only use occasionally but don’t want to turn into a full-time rental property. You can make some extra income during peak seasons or special events without the added worry of paying taxes on it. This can be a great strategy if your vacation home is near popular venues or attractions that bring in a lot of visitors for short periods.

Another use for the Augusta Rule is shifting income from your business. If you’re a business owner (other than a Schedule C taxpayer) and don’t use your home as your primary place of business, you can rent your home to the company, shifting business profits to personal income, where there are no tax consequences.

For example, you might host a monthly meeting with your Board of Directors or a quarterly management retreat. As long as you don’t exceed 14 days and charge a reasonable amount for rent, you can deduct the rental payment on your business tax return and don’t have to pay taxes on that income on your personal return.

The rule doesn’t require you to itemize deductions, so even if you take the standard deduction on your taxes, you can still benefit from the Augusta Rule. Pretty neat, right?

A unique opportunity for tax-free income

While the Augusta Rule can be a lucrative tax break, it’s important to keep everything above board. The IRS tends to look closely at rental income deductions, so make sure you’re following the rules to the letter. Keep accurate records, have a written rental agreement, and make sure you’re charging a fair rental price. That way, you’ll avoid any unwanted attention from the tax authorities.

Whether you’re renting out your place for a few weekends on Airbnb or letting it out during a major event, the key is making sure you’re following the guidelines and tracking your rental days and income carefully. 

Tax laws can be complex, and every situation is unique. Contact a tax advisor if you want customized advice, ensuring you’re making the most of the tax benefits available. Then go ahead and enjoy those 14 tax-free days—it’s one less thing to stress about when tax season rolls around!