Anyone who lives in a highly seasonal tourist destination knows you can make money on short-term rentals during events and festivities in your city or town. Think high concentration, short-term, tourist-driven events such as horse racing season in Saratoga Springs, N.Y., or The Masters Tournament in Augusta, Ga.
As a result, it is common for locals to get out of dodge and rent out their place during these highly lucrative periods. Typically, this is just for a very brief period while they are on vacation somewhere else themselves, for instance.
Given these circumstances, Congress realized it does not make sense to tax rental income for very short-term periods the same way that long-term rentals are taxed. In response, the government passed the Section 280A exclusion, often called the Augusta Rule in reference to the famous Masters golf tournament.
For the remainder of this article, we will look at the Augusta Rule in more detail and provide practical considerations for taxpayers.
The Augusta Rule, aka the Section 280A Exclusion
At its core, the Augusta Rule creates an exclusion to the concept that real estate rental income is always taxable.Per Section 280A, renting out your residence for 14 days or less, you are exempt from reporting the rental income. This also means no deduction for rental expenses. So, it is like it never happened from a tax perspective. As soon as you rent out that residence for 15 days or more, this exception no longer applies.
Note, it does not matter why you rented out your residence. There is no need for it to be related to an event or any special occasion.
Technical Workings of the Augusta Rule
While the basic rule itself is quite simple, there are details you need to meet in order to qualify for the exclusion – in addition to the 14-day time limit.
- The property must be a home or similar. This means the properly must be a "dwelling unit" per IRS definitions, meaning houses, apartments, condos, etc. (although houseboats do qualify).
- The rental price must be reasonable. Look at comparable rents in the area to get an idea of what to charge. Luckily, this is easy today with Airbnb, VRBO, etc.
Practical Considerations
First, the above rules only apply to federal income taxation. State and local tax regulations may differ, so make sure you are up to snuff on these for your area.
Second, just because the IRS does not consider this kind of rental activity a real estate business does not mean you are exempt from local, state or other business licensing or permit needs.
Conclusion
Qualifying under the Augusta Rule can be a wonderful way to save taxes. It can be especially beneficial to those who live in or around major events that occur for only a brief period and bring in massive amounts of tourists, creating high demand and soaring prices as a result. Moreover, it can be a terrific way to a make some tax-exempt income while you are enjoying a personal vacation.
In the end, you must pay attention to the timing – and most importantly, keep excellent records.
