Ep 273 | The Augusta Rule

Thank you for joining me today. It's Brian Gubernick and welcome to the No Days Off podcast where we believe that every single day brings a new opportunity to get better. Today I want to get better at money. We're going to talk a little bit about tax and we're going to do so not because, well, by the time we're listening to this, it's probably tax day. Or thereabout for personal taxes. Uh, but we're going to talk about taxes because my favorite golf tournament, which is the Masters, uh, is currently being played, or actually by the time we listened to it, probably was just completed. Now, why do I want to talk about taxes and Augusta, Augusta National Golf Club? Well, there's a tax rule around Augusta that every single one of us can benefit from if in fact we own our primary residence. So in the world of taxation, in the world of wealth management, there are fewer, I think, loopholes better than this little-known gem, because this little-known gem, this tax rule we're going to talk about, can significantly benefit homeowners and small business owners. And that's, that's who's listening here at No Days Off. So the Augusta tax loophole, It's also known as the Augusta Rule IRS exemption. I think it's Section 280A of the Internal Revenue Code. This loophole allows for homeowners to exclude up to 14 days of rental income from their taxable income. So how did it get this name? Why is it called the Augusta Rule? The Augusta tax loophole got its name from Augusta, Georgia, which is where the Masters Golf tournament is held every single year at Augusta National Golf Club. Sometime in the '70s, the residents of Augusta lobbied for a tax provision, and this tax provision allowed for them to rent out their homes to tournament attendees without facing tax obligation on the income earned from renting out their homes. Now, them lobbying, their efforts were successful. Section 280A was added to the tax code. And now this IRS Augusta rule extends to homeowners, not just in Augusta, but across the US. And it's again, an amazing opportunity. So how does it work? The Augusta tax loophole allows for a homeowner to exclude rental income from their taxable income. Now, this is only allowed under certain conditions and Section 280A states that if a dwelling unit is used as a personal residence, and if it's rented for less than 15 days during the taxable year. So 14 or fewer days. If you hit 15, you undermine the rule. It gets thrown out the door. But 14 or fewer, you rent the home for 14 or fewer days in a taxable year, the income derived from that use is not included in your gross income. Now here's some key points to remember. The exemption only applies to primary homes. And secondary homes and vacation homes, as long as the taxpayer uses the dwelling unit as a residence. Uh, expenses, expenses have to be related to the rental of these properties, but the expenses related to the rental of these properties are not actually deductible, just the income itself. You could have non-consecutive days. It doesn't have to be 14 days straight. It's a 14-day restriction, but it doesn't have to be consecutive. So homeowners can rent their property for various short periods of time throughout the year, as long as they don't exceed a total of 14 days in one tax year. And then lastly, rent's gotta be market rent. It's gotta be reasonable for the location, for the date, which makes certain that it's in line with, with market rates. Okay. So how does this work in practice? I own my own business, right? And every year— all right, let me rephrase that— every month, my business, the, the members of my business, get together and meet. Now, I could, if I want to meet outside the office, I could go rent a space at a hotel in Scottsdale where I reside. I could get AV. You know, to run that meeting. I can get food, you know, for that meeting. And if I were to go to say the Westin in Kiroland in Scottsdale, that would probably run me about $4,000 for the day for me to rent a room with AV and food for about a dozen people. It's going to run me about $4,000 if they have something available. Instead of my business paying $4,000 to the Westin, my business instead can rent my primary residence and hold that same meeting there for, call it, $4,000. That's one day. I can do that every month plus 2 more times if in fact I'm holding a bona fide meeting and it's real and we're, we're, we're, conducting business and we're maintaining minutes and, and it's a real thing, right? I could do it 14 times at that $4,000 market rate. So run that math out. That's $56,000 that my business will spend renting out my personal residence, my primary residence from me. Now that $56,000 is an expense to my business. It's reducing the business's income, but the $56,000 is income to me individually, but it is tax-exempt given the, given the Augusta rule. You follow me? So if you own your home, you are able to rent your home out to maybe just someone looking for a short-term rental for 14 days, and you can exclude that income from your personal income for tax purposes. But in my case, I went another step further and I'm actually renting my home out 14 times a year to one of my own businesses. So I create an expense for my own business and I don't have income to me personally. So I'm lowering my income in the business and I'm excluding that income to me personally. Again, you could just rent your home out for 7 days. As a rental, and that's not income to you under the Augusta rule. It's not taxable income to you. But if you want to supercharge this, you can rent it to your own business, which thereby creates an expense. This is one of the most amazing tax loopholes available to you as a small business owner, as a homeowner, right? If you're a small business owner, you create— you could create the expense. If you're just a homeowner, uh, you can rent your property out short-term if you so choose for 14 or fewer days. So around Scottsdale, we have a big golf tournament of our own, the Waste Management, every year. If I wanted to rent my house out for say $1,000 a night over the course of that, that one-week tournament, let's say I rent it out for 7 days at $1,000, at $7,000, that income is non-taxable given the Augusta rule. If I, if I go beyond those 14 days, It now is taxable. So be very careful there. Now, goes without saying, I'm not your accountant. I am not licensed to give you tax advice, but what I am authorized to tell you is that you better be asking your CPA about how you can be taking advantage of the Augusta rule in 2024 if you've yet to do it. If your CPA is not quite clear as to how to make this happen, or is even unwilling to work with you on it, no disrespect to your CPA, but it might be time for you to go shop for a new one. Please take advantage of this rule. It creates more opportunity for you to then turn around and leverage those dollars for investing in real estate or building your business, which ultimately, ultimately aids the economy as a whole, which is why loopholes like this exist, okay, to spur more economic spend, more, uh, you as a small business owner participating at a higher level in the economy, which keeps things humming. That's all I have for you today, the No Days Off podcast. Thank you so much for listening, and remember, every single day brings a new opportunity to get better. So let's get after it.