This Tax LOOPHOLE Makes LLC & S-Corp Owners THOUSANDS.

Hey everybody. Welcome to a another awesome Main street business podcast where I get to talk to you about building your American dream. Today we're going to talk about the Augusta Rule and there's a lot of misinformation out there about it. It can, it's a, it's a legitimate tax strategy. It also gets abused. It's a little scary out there how I see clients try to take advantage of it and they get into problems in audit. So I want to go through what the Augusta Rule is, how you can take advantage of it, when to use it, and the best practices in general. This is all of you taking advantage of renting your home either to someone during a big event like a Super bowl or a golf tournament or something, and or renting it to your own corporation for a certain number of days and creating tax free income. I'll explain the rule. It's pretty cool. Buckle up. Now, for those that are new here, I want you to feel confident in the information receiving. My name is Mark Kohler. I'm a CPA attorney, best selling author, podcaster, YouTube personality and I love, love, love saving money and making money. I love the American dream. I love small Main street business and using our home to rent to others. Or we may have rental properties and we're building a business. We have may have a day job. It's all of work of art. It's all got to be incorporated and integrated together. So if you have questions about renting your home, please start typing them up in the chat in the different platforms you might be watching. Today. We've got streaming on multiple platforms. I'm excited to be here with you. I'm going to answer your questions in full now. The Augusta Rule. Where the freak did this come from? The Augusta Rule started in the little town of Augusta, Georgia. And if you. I've been to Augusta, Georgia, man, they have a private airstrip. That's insane for just what? The Masters. The Masters is the biggest golf tournament in America every year and corporations will send jets down there for the whole week or two to have a big party and go schmooze their staff, their high end, highly compensated employees and clients with an experience at the Masters. Well, what happened years ago, it started with people renting their home to corporations and others. They're like, hey, this place is a zoo. For two weeks out of the year, I'm going to rent my house for a week or two weeks for 10 grand, 20 grand, 30 grand. These big corporations come down from New York and D.C. and they're like, hey, let's rent these houses all over Augusta, Georgia. This is before Airbnbs even existed or vrbo. And so people would rent their home for a week or two and then they turn around and go, what do I do on my tax return? So in the code, this is IRC code section 280A G. I want to get that right. 280AG this code section allows taxpayers if they're going to rent their home out for less than 15 days to anybody for any amount that's fair market value, any amount. You don't get a deduction as a rental property, but you also don't have to claim the income. So you could make so rent your house for ten grand a day during the super bowl, the Masters, a big sporting event, the Olympics, and those 14 days you don't have to claim the income. That's the Augusta rule. All originating in Augusta, Georgia. With the Masters. It's been well used for years and years and years. It's well documented. Now here's the problem. What happens is small business owners like, hey, I can rent my house for $2,000 a day. I heard this at a cool seminar this weekend and some influencer told me I should be doing the Augusta rule. So I'm going to rent my house back to my business and my business gets a great write off and I don't have to claim the income. So technically that's true. That is correct. But there's some rules here. Number one, you've got to make sure that you actually have a business purpose that makes sense and that you are having a legitimate business purpose for using your home. Number two, it's got to be fair market value when you're renting the home back to yourself. And there's court cases on this all over, I don't need to get into them. But you're going to rent it to your own business for fair market value. Now if you're going to have 20 people over and the same size of room at the Hampton Inn for that time or some somewhere of equal comparable quality would be $1500. Then you can write yourself a check for $1500. So your business gets a tax deduction of $1500 as if it would had paid Hilton or had the Hyatt. And you get to take that check and go cash it in the bank with no taxes owing. You don't even have to claim it on your tax return. You get audited four ways till Sunday. But if, if the IRS does come looking, they're going to go. Who attended your meeting? You should have a role. You should have that business purpose. Was it for clients that I was selling a product to? I mean, think of some of the multi level marketing you might be doing lotions or potions or whatever and having a party and selling whatever. Keep a record of who attended, what you sold and the business purpose. If you're going to do it in your own company, who attended? Now this is where the rules get a little dicey. Who are these people attending? Your brother, your sister, your mom, your spouse, your kids. It's not going to cut it. It's got to be employees that don't have any ownership in the company or not family. And it can't be your super bowl party for your family. That's not going to cut it. And it can't be a party. It's got to be a literal business meeting or training or sales pitch or whatever. So you're bringing in people that are not owners. Could be again, vendors, customers, clients, employees that don't own anything, that aren't family. You keep a good record of what you do and you look for what's the fair market value for that rent. Now here in Phoenix this time of year is kind of fun. You've got spring training, people coming in for the baseball games that might want your house for a week or two. You've got super bowl was last year. We've got Final Four coming up next month. We have waste management next week, which is the biggest golf tournament in Phoenix every year. And so it's kind of crazy in Phoenix this few months where it's perfect weather and people are coming in and they're going to go to Airbnb and vrbo. So you might want to put your personal residence on a platform for that two weeks. Also, you may have a valid corporation or company and you want to rent it to yourself. That's great. Now I use the diagram, the trifecta to show this on a regular basis what your business structure may be like. Let's just take a quick visual look of what your trifecta should look like. So here down at the bottom of the trifecta is your revocable living trust and your 1040 tax return. We're going to split your life in half and your operational business is going to be over here. So if you have, in fact, I'm getting a call here. Can you pick this up here? All right, now, operations and passive income on the right side and on operations, you might have a side hustle, you might have an s Corp. And then you might even have a day job. The passive side might have your rental property. It might have your IRA or 401k. Well, off to the side owned by your trust is your own personal residence. So your own personal res is going to be renting the home to your S corporation or your side hustle. And that rent is going to come with a payment back to you personally that will end up in your 1040. So you're going to 1099, which is the last piece of this rule that I'm going to give to you. So you're going to 1099 yourself and it's going to be a rent expense on your S Corp. Return or your schedule C for your LLC side hustle. It's going to be rent, but you don't have to pick up the income over here tax free. Pretty sweet, right? That's what we're shooting for. All right, so that's the methodology of paying yourself for the use of your home through a rent expense. And it's called the Augusta Rule 2. 80 a. G. That's the code section for it. Now the last piece to make this all happen is you have to issue yourself a 1099. You have to 1099 yourself for the rent. Now it's a 1099. Ms. Misc. Let's go. Whiteboard. I'll just draw it out. So 1099 MSC. Sorry, Ms. Misc. So this 1099 Ms. Is supposed to be mailed to yourself. You got to be able to document it by January 31st. And then you're going to send in your 1096 that goes as a cover letter to all the 1099s. And that's due in January 31st. Well, if you miss the deadline, you want to catch up right away and do it, it's a $60 penalty for being late 30 days. Then after that. And this is an article in my on my blog. And Kirby, do we want to let everybody Write the word 1099 and they can? Nope. Okay, so we'll give you any indications on how to download this or we will include the link in the description. So it's a 1099 article from my blog and the penalty goes up to $120 per. 1099 is between 30 days and August 2nd. So it kind of gives you some time there, three or four months, five months to get that out the door. And that's $120 penalty. $120 penalty to write off thousands of dollars in this Augusta rule, it's okay, so talk to your accountant, issue yourself a late 1099 Ms. Misc and get this done. And document the rent that you may have paid yourself last year in 2023 for this expense and book it as a journal entry on your books on your tax return and make sure you have the documentation to back up who attended, what the business purpose was, and ching, you've got your thing. You're good, you're good to go. So that's the Augusta rule. Exciting. A great tax write off could work for 2023, 2024. Follow the rules, you're off to the races. All right, so now we're going to take some questions here. I'm all yours. Rentals, Augusta rules, business, love it. It's all intertwined. What do we got?

Okay, first question is from Nicole. If I build an ADU on my primary and rent it out, how much can I write off from it? Construction costs two.

Okay, great comment, everybody. This is not going to fall under the Augusta rule, but it's all related to building rental property and especially on our home. So let's whiteboard. So some of you, I'm going to do my best at a 3D representation. Okay, so here's a little house, okay? And this is your home. And an ADU is a, an option in a lot of states now where the city will let you build, you know, create a pad here, if you will, and you're going to build an accessory dwelling unit. Adu, accessory dwelling unit. And you're going to build this other cute little rental here, and this little rental, you might, it typically is going to be a long term rental. Some people are doing Airbnb with them, some are doing midterm, and some are doing long term. So different rules there. But the question was, Nicole said, is if I build this ADU and I start collecting income and you're going to put this Nicole, everybody on a schedule e on your 1040. That's great. The write off is the depreciation of the cost of building this. So whatever it costs to build it, everything you can't write off the land, but you're going to be able to write off all of the construction and furnishings, depending on what you put into it, Materials, even any loan costs, interest, improve, any furniture, everything. So anything that you put into this house that you're going to rent is a write off and it's going to go on schedule E and you're going to depreciate the building cost, which we love. Also, let's say that this is 10% of your property? Well, maybe 20%. So let's say we do the math with square footage and this is 20% of the property and all of the personal is 80%. Well, now you get to write off 20% of property taxes, 20% of HOA fees, 20% of utilities or if you have specific utilities to ADU. So this is a great way to build wealth. It's a great tax write off. You, it's considered a small business. I want you writing off your cell phone, your home office, some auto, all sorts of goodies. This is a great method, Nicole. I love what you're doing. All right, next question. Drop the whiteboard if you could. Thank you, Brianne. Thank you for running a great show here in the studio. She's my director. I've told her to kick my butt if I'm not on track here.

So conspirator of plots said, if I rent an apartment and dedicate a room to work alone, can I write it off? And if so, do I have to inform the apartment manager?

Definitely do not tell the apartment manager there on a need to know basis. Number two, now I don't want to encourage you to break your lease or anything but a home office I doubt is going to violate a lease. Now if you were to have patrons, you were going to open a barber shop or something or a tattoo parlor in your apartment, you might have a problem in the lease running a commercial operation out of your home with patrons. But to have a home office, I don't see a problem with typical leases. Next. Yes, you're going to take the home office deduction. Now there's two different ways to do home office. There's the standard where you're going to do a percentage of based on the square footage of everything, a percentage of the rent, utilities, yada yada. The other piece is called the simplified method. The other option and that one, you get to take up to $5 on up to 300 square feet annually. So that's a $1,500 deduction. It's not chump change. It's quick. Fifteen hundred dollars deduction that's probably going to save you $500 in taxes. It's a good thing and it's easy. You don't have to worry about all the math per se. You go, this separate room is X number of square feet times $5. There's your write off for the whole year. You can go the major method that will work too and get over to my YouTube channel for videos on home office and articles on my Blog.

Next question is from Patrick. Can my son buy a house and rent it to his live in girlfriend while also living there?

Okay, I'm loving this story. Live in girlfriend. This Days of our Lives. This is good. So I got to get the facts here. Son has a girlfriend. This is great. I'd like to explore that. Okay, so then he's going to build a house. He's going to do what? Buy a house, charge rent on his girlfriend. Okay, so this is where it gets good. So I got to figure this out. So. Hey, babe, I love you. Hey, do you want to move in with me? But I, I want you to pay rent. I don't know, ladies. Is that going to fly? I don't know. Okay, let's say it flies. He's like, okay. She's like, all right, I'm in. I'll pay rent. Okay. And the son is going to own the bill, the house. I thought dad was going to buy the house. So if dad buys the house to charge rent of son and girlfriend. But okay, so son's going to own the house and rent and he's going to live there. Okay, so it's okay to do room rentals. I just worked on a lease agreement for a room rental this last week with a client. That's the type of agreement you would do. And he would charge her rent but through a room rental scenario. And it unlocks a bunch of write offs. So you'd look at the, say it's a three two. That means three bedroom, two bathroom, three two. And he's going to rent one bedroom and she's going to have access to the rest of the house. One could argue that that's a. He's renting a third of the house. So he could depreciate a third of the house, take write offs of third of the expenses. Do we want to do that? And now we've got, is he going to live there as his primary residence for more than two years? Then we could sell the house tax free. Do we really want to convert this house into a rental and rent the rooms? Maybe. Are you going to rent other rooms? Are you going to turn it into a rental when you and your girlfriend move out? There's a lot of options there. I would really recommend do a consult with one of my tax lawyers. We help clients all over the country. Kqslawyers.com and just book an hour with one of my tax lawyers and go, do we need an llc? How are we going to rent to the daughter, the girlfriend? What's A lease agreement should look like. Will you give us one? We have all sorts of templates on lease agreements that we can help tailor to you. The answer is yes, he could do it and he'd rent it and claim it. But you may want to just do it under the table in the sense that the IRS isn't going to lose in that situation. And I don't know if this your son's going to win with just a one room rental. So do the math. Look at the cost benefit analysis.

Okay, so Joseph says, hi, mark. Is the 1099 being heavily enforced this year? I have a real estate business where we flip houses and in the past my CPA has counted the rehab payments made to contractors as expenses.

Yeah, you're okay. You say a lot there. First of all and thank you. It was Andrew Joseph. Sorry, how do I come up with Andrew Joseph, thank you for your hello. Thanks. So Joseph, wow, you threw out there that my CPA has written off the rehab costs as expenses before. Typically your accountant should be adding those to the construction costs basis of the property. Certain things are a write off. Certain things are added to basis and then taken as a write off when you sell the property. So I'd be careful saying, hey, my accountant writes off all my rehab as expenses because they really aren't. Some are. Some are added to basis and then taken when you sell the property. Just a side note, be careful with the way you said that. And the real question is 1099s. Well, if you're paying people more than $600 to work on your rehab projects, you're required to send a 1099. And everybody, there's an article right here in the description below on my 1099. It's number one when you search 1099s on Google. My article is number one. So it's very helpful with tables and rules. You ask a kind of a funny question. It's like, what is the IRS going to do? Are they going to enforce this? I don't know. I don't plan my tax reporting on. Do you think they're going to catch me? Do you think they're going to audit me? I would say do the freaking 1099s. It's not worth the risk. The penalty can be as high as $500 per 1099. And right now the the penalty is 60 bucks. If you miss the window, use track1099.com we love that. It's a simple. I don't get any. I wish I had a code to get an affiliate fee out of this. I need to make a relationship like that. But I love these 1099 software companies like Track 1099. You input the info, they kick out the 1099. You know it's done right the end. So when in doubt, file the damn returns. Everybody don't guess if the IRS is going to enforce it or not. I've had clients get enforced this issue and some clients get by every year. I never know and so just know Joe Biden allocated $80 billion and gave it to the IRS to say go hire more people. Audit more people. Audit more business owners. Audit more middle income America with side hustles. That's you be careful. Okay?

Okay, we have a few more here. Malachi says I want to buy a 2 to 4 unit on FHA, living in it for at least a year str or renting other units. I also plan on becoming a full time Future Trader in 12 to 18 months. How should the business be structured?

Okay, your future trader business, total separate topic, total separate entity, total separate issue, which I'll come to in a moment. How do we structure your rental business? It's going to be an LLC set up in the state where your property is. Now if you're worth millions of dollars, we might might talk about Wyoming or Ohio, Nevada, other states as a barrier with some another layer of asset protection. But don't go there out of the gate. Set up your LLC for the two to fourplex in the state where you're going to do the deal close in your name. If the bank requires it, then deed the property of the llc. Do not worry about the due on sale clause, people. We've transferred thousands of thousands and thousands of properties to LLCs getting good asset protection. The IRS doesn't care, the banks don't care. In 20 plus years I' had a client audit a bank called the due on sale clause. So get that property over to an LLC now. Whether or not you do midterm long term or Airbnb with the three other units, run the numbers. Airbnb is in midterm, require you to furnish the place. Do you have the money to furnish? You're going to get more rent, but you got to pay to furnish the thing. And it takes a little more management time, but you make more money. You got to find what fits for you. You get long term all three, you get Airbnb one midterm, one long term. The other one you got three units to play with in your fourplex. But it's going to be an llc. Then you're going to move out, rent out your space, do it again. Love it. Keep it in the llc. Go, go now. Full time trader status. Holy crap. One of the biggest scams out there is telling people that active trader status is a good idea and it works for you on your tax returns. It is a nightmare. And the people recommending active trader status are these companies selling trader strategies. Oh, forex this and 4x. You could should be a full time trader and you're going to get to write off your home office and write off all these expenses. They don't tell you the nightmare on the back end. Now I've got other videos on trader status telling people to watch out. It's on YouTube and on my blog articles. Please look into it, get a second opinion, especially from my law firm at least or any of the tax advisors on my TaxPro network. If you're looking for an accountant people and you don't have one, please get over to markjkohler.com and at the first very top, I have the Tax Pro network. Over 500 accountants around the country that are trained on my strategies that meet with me weekly. I learned from them, they learn from me. We're a tribe and we freaking are aggressive. We do it right and honestly with integrity. Get a new accountant this season, people. Get to my main street tax Pro network. Be careful the trader status. Anybody in my network is going to tell you the same thing. Get a second opinion before you do it. Next question.

Skew says if I want to turn an unfinished storage room in my house into a gym for my company, is there a strategy for writing off the cost, building out the room and gym equipment?

I love it. Everything sounded great. A gym for my employees. I've got an office right next to the studio. I could blow it out, put it on, you know, equipment, write it off and it would. All the equipment I could depreciate, maybe a bonus 179 all in a straight shot. I could. The cost of the rooms are right off. The whole damn thing's a write off. Oh, you want to put this in your home? And let me guess, you're going to use it too. You're playing with fire. I don't like it. You want to put in a gym for your employees, that's great. You might be able to meander in there once in a while. But if this is in your home and you're going to be using it and it's for my employees, you better have a separate entrance. Have that documented. Nine ways Till Sunday. These better employees better not be family. You better not be using that for personally more than anyone else by far. I just. You're playing with fire now. You want to throw in a gym for your employees at the office building that you own and where the employees work. Knock yourself out. Throw in daycare while you're at it, but don't do it in your own house. It ain't gonna fly. I just don't like it and I'm aggressive, so be careful.

Okay? So Melody says, is it actually worth having different LLCs under an umbrella company? And how does that work as far as tax reporting to the irs?

And first name again?

Melody.

Melody. Melody. Yes, it can work, and yes, it can be great. And I'll diagram the tax flow, but it's not for everybody. That's the problem. It works. They're awesome. Asset protection. But I don't even do it. I don't even do it. And I could set up as many LLCs as I freaking want with my law firm. And I already own rental property, but I don't even own enough rental property to make it sense for me to do it. So if someone's selling you on this structure, I'm hoping you're worth five to $10 million in real estate. And we've got some good reasons. So let's diagram it here, what this looks like. Melody asked a great question, everybody. So here you've got your revocable living trust, you've got your 1040, and we're building your trifecta. We're not going to talk about your ops or your day job or your side hustle. That's all over here. What we're talking about is your rental property and how many LLCs you might have. Now option one is you have maybe two LLCs and it owns two or three properties each. This might be your Tennessee LLC. This might be your New Jersey LLC. Looks great. You got asset protection, it's clean. You got two or three properties in each llc. I am not the type to set up a new LLC for every frickin rental. Now let's say all of a sudden, oh, Mark, these rentals are off the chart. This is on a golf course, it's worth 500 grand. This is a commercial building, it's worth seven. Or a little strip mall location, it's worth 750 grand and I've almost paid it off. This one's worth 400 grand, this one's worth 300 grand. And these are net equity numbers, 500 grand. This one's Worth a million. Well, holy crap, I might peel off a new LLC here because this one deserves its own bucket. So you're putting, what you're doing is you're trying to put your eggs in different baskets. And so I want to first diversify my portfolio so I've got protection between these different rentals. That's number one. What Melody is talking about is adding a parent company down here which is called a cope Charging Order Protection Entity. Typically we like Wyoming and Ohio for this because there's some privacy benefits and filing benefits and then this LLC owns all your other LLCs. This is what Melody's talking about, a two layer structure. Now you're getting protection from anybody suing you. See, if I get in a car accident and someone sues me, they can get right through my New Jersey LLC and get to my rentals. What? I thought the LLC protected me, Mark. No, it protects you from the renters. It doesn't protect the rental from you being a dumb ass. So when you're out there driving around, texting and driving, you're going to get sued and they're going to come after your rentals. This LLC creates a barrier so if someone comes after you, they got to go. I got to go back through a Wyoming entity to get to these properties. That's the extra protection. So Melody, does it make sense? Yes. Is it awesome for asset protection? Yes. Does everybody need it? Hell no. And you want to. There's cost to this and it's a structure and the people selling it are usually charging three times more than we charge. And they're selling to every Tom, Dick and Harry for every little rental they get. Get a second opinion by law firm. We want to be with you for years and years to come. We're not going to sell crap you don't need. Now the last thing I'm going to go with the color red. Go back over there, Brianne. So let's talk about income. This is typically if I'm going to do a COPE and you're a client's at this level, we're going to do two member llc, still be owned by your trust, but we're going to put husband and wife on this. We're going to file a 1065 tax return. That's normally what we would do at this level. All of these other LLCs are single member LLCs that flow down into the parent. So they're all owned 100% by this one. It's one tax return. It's a consolidated tax return where everything is reported all together on 110 65. So each has its own bank account, its own QuickBooks file. Bank account, QuickBooks file. Bank account, quickbooks file. But then it all is matrix brought together in a consolidated tax return. You can tow it all on a schedule either. But if you're going this level, you're going to probably drop in the 1065 anyway. All right, next question.

Okay, we'll do two more questions. One from Mazanin. If I rent rooms in my primary and I sell the property later, can I use some of the profit to do a 1031 exchange?

Absolutely. And so whiteboard, one thing that you might see common is a client that owns a home and say they've got four rooms. And it's not a four plex. These are just rooms. And they're doing a room rental scenario. So the client lives here, this is your primary, that's yours. And then you're renting these three other rooms. Now, as you meet with your accountant and you do the tax return, I'm not saying it's a 75, 25 allocation. You might assume that that could be the situation, but we got to look at square footage and the use. But let's just say it's 75, 25%. So now what you've got. Oop, sorry everybody. So what you've got is a tax return where you're allocating 75% of the depreciation and expenses to business. And 25% is personal. So when you go sell the home, this piece is all business and that's going to go in a 1031 exchange. The 25% in this example would go with the sale of home exemption tax free, assuming you lived in it two years. So if you live in this two years, you're able to wipe this out tax free. And then whatever else is rental, you 1031 to another rental property and freaking loving it. Good to go. All right, last question. I take it whiteboard off.

Okay, last question is from Micah. I put our property we acquired in October 2023 into an STR in December, had three bookings, less than seven days on average. Can we do the STR loophole?

Another question. Did you put in your hundred hours documented of participation in prepping that short term rental? If so, you meet the less than seven day rental period, you had three renters, less than seven day average, and you can't have an average without two or three. So you meet that rule, you put in your 100 hours of material participation, you unlock that short term rental, you get a cost seg done on the property. And you're going to be aggressive with the depreciation bonus. Depreciation of 80% for last year. You're going to pop that through a schedule E. It'll unlock any losses because it's a short term rental loophole and those losses can offset your other income. Then this year you reevaluate. I'm going to go midterm, I'm going to go long term, whatever. You get to choose. We don't know how long this loophole is going to last, but it's alive and well right now. I'm using it, love it. Short term rentals are great for cash flow, but they take more work and there's some risk. You never know are you going to be up or down in a market with a short term rental. And you got to make sure your area, your neighborhood, HOA isn't going to shut you down the minute you go for this. So lots of risks, but the upside can be phenomenal. So. Well everybody, thank you for listening in on the uniqueness of renting your own home, rooms in your home, turning it into a rental, using the Augusta rule. So many freaking awesome options, people. Tax strategies are alive and well and if you hear anything that sounds too good to be true, get a second opinion. I love what I'm doing here with our community. I'm grateful you're here. Please continue to participate. And I know how I do. I talk to so many clients and followers and people that are struggling. It can be so tough financially right now finding additional ways to generate revenue with your home. That side hustle. Having a small business, it's beautiful. It can unlock so much for additional revenue, additional write offs, building wealth, getting out of debt. Hey, if you're listening to this and it's speaking to you, you're in the right spot. Please subscribe to me on YouTube, my podcast. Check out our network on my website. It's all down below in the description. And if you love this, please give a review and a like and hit the bell icon. I'll be here next week helping you continue to build your American dream. Don't give up.