What is the Augusta Rule 280A Tax Loophole?

A few years ago, my friend won the Masters Tournament ticket lottery. Given how much demand there is for one of the most prestigious PGA golf tournaments, you have to enter a ticket lottery to get a chance to buy tickets to the week-long event.

My friend won the right to purchase four tickets to Wednesday’s practice session. That’s the best practice session to go to because it’s also the day of the fun Par 3 Contest.

The event is so widely attended that people will rent out their homes to tourists just for that week. Imagine locking up all your stuff just so you can rent out your home to a stranger for a couple days – it’s that lucrative.

As it turns out, not only is the rent really high but you might not have to pay taxes on it. It’s known as the Masters Rule or Augusta Rule, the name of the city where the Masters Tournament is held.

What is the Augusta Rule (or Masters Rule)?

If you rent out your home for 14 or fewer days a year, you do not have to pay taxes on this income. It’s in Section 280A(g) of the tax code – disallowance of certain expenses in connection with business use of home, rental of vacation homes, etc.

The specific section 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.

The special rule is extremely useful.

This must not be a full-time rental property and you can rent it up to 14 days a year without having to pay any taxes on the income. The days don’t have to be consecutive.

If you rent it for a 15th day – boom, taxes are due for all the days.

Here’s the kicker – it doesn’t matter how much rental income you bring in! There is no cap to the amount of income 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 just have to make sure it’s rented for a reasonable amount, especially if you rent it to yourself.

There is one “catch” – you can’t claim the expenses related to the rental. But since you aren’t paying tax on the income, it makes sense that you can’t “double dip” by claiming the expenses incurred as a result.

Be aware of local taxes & rules

The income is not subject to federal income taxes but your state and local government may have a tax. Since you are renting out your home for a short period of time, you may also have to pay a hotel or lodging tax.

Airbnb has a lot of good documents that can get you up to speed about local laws. For example, this page covers occupancy tax collection in my home state of Maryland. While I might not owe income taxes for the rental, I may owe a state sales tax to Maryland. If my home were in Baltimore County, I’d have to pay a “Transient Occupancy Tax” of 9.5%.

Also, be aware of local rules and restrictions on this type of rental.

It’s important to know the local laws on this because some places are a bit stricter about it.

How to claim the Augusta Rule

You want to make sure you have all of your documentation but the rule is an income exclusion – you simply don’t report the rental revenue. It’s as if it never happens.

This is not uncommon – whenever you sell a home, you do the same for any gains up to $250,000 ($500,000 for couples). If you qualify for the home sale tax exclusion, you simply don’t include it on your tax return if you’re under the exclusion amount.

Much like the home sale tax exclusion, the Augusta Rule has no income restrictions.

What are some other uses?

I had a friend who lived in a very trendy part of San Diego and he would rent out his apartment on Airbnb during high demand time periods. During those days, he’d put his stuff into a locked closet and crash on a friend’s couch to collect some hefty short term rent. He was probably running afoul of some subleasing agreement rules (he was renting his apartment at the time) but at least the income was tax free! (plus when you’re young, some rules are a little more bendy than others)

If you operate a business, you could rent your home to your business for large events or other gatherings. If you do this, you are inviting scrutiny so be sure you can document the attendees, the business purpose, and make sure that the rent you pay yourself is reasonable.

To know if the rent you pay is reasonable, find out how much it would cost to hold the same event at a local restaurant or hotel. If it’s an outdoor corporate barbecue, you can see how much it would cost to rent a local venue suitable for an event of that nature.

Those quotes will be part of your documentation in case someone asks.

If you still don’t believe it, check out Topic No. 415 Renting Residential and Vacation Property from the IRS. In the section titled “Minimal Rental Use,” they succinctly explain the Augusta Rule – “There’s a special rule if you use a dwelling unit as a residence and rent it for fewer than 15 days. In this case, don’t report any of the rental income and don’t deduct any expenses as rental expenses.”

There you have it!