A strategy that has been bouncing around social media recently involves renting your home to your business for a tax deduction. But most posts aren’t clear on how this works or if it’s legal. We’re here to break it down for you.
The Augusta Loophole is a part of the Internal Revenue Code (IRC) that allows a home owner to rent their home out for up to 14 days without claiming rental income on their taxes. This loophole was put in place to help residents around Augusta, Georgia who rented their residence out for a golf tournament. Hence the name the Augusta Loophole. Generally rental income is taxable, but when the rental income is for such a brief period of time and the rental involves the taxpayer’s residence the IRC allows the rental income to be tax free. The home may not be the principal place of business for the taxpayer.
So how does this work as a deduction for the taxpayer’s business? The business cannot be a sole proprietorship - self rental rules prevent this. The rental must also be for a legitimate business purpose. The business can’t just decide it wants to throw a party. Legitimate business purposes may be something such as a special training or meeting that would benefit from more space than the office can provide. The rental should be supported with a contract and should be at market rate for the rental.
The general idea here is the rental fee is deductible to the business which reduces taxable income but it is not taxable to the home owner. So the homeowner is essentially moving money from a taxable pocket to a nontaxable pocket while also gaining a benefit for the business by utilizing their home for a specific event/purpose/etc.
At our firm we assist our clients in the proper documentation of this deduction. Fair rental rate calculation support should be put together along with a rental contract.