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Do You Have to Pay Taxes on Rental Income?

Looking to rent out your residence? Thanks the the Augusta rule, you can rent out your home for up to 14 days tax free.

Thinking about renting out your residence? Services and platforms like Airbnb make this easy. But do you have to pay taxes on rental income? Well in this article I will answer that question!

Secret to Avoiding Income Tax on Rental Income

The Augusta Rule, referred to as IRC Section 280A(g), allows taxpayers to rent out their homes for up to 14 days tax free! It is a significant tax benefit for homeowners who live near major sporting events like the Super Bowl. So the answer to the question of “Do you have to pay taxes on rental income?” is dependent on how many days you rent your residence out for.

Say a major sporting event is in town and you can rent out your apartment for $1,000 a day. You could walk away with all that cash tax free if the rental was for less than 15 days.

Why do they call it The Augusta rule? Well, the rule actually gets it’s name from the home of the Master’s Tournament – Augusta Georgia. As many as 50,000 fans from across the country come to Augusta every year to see the world’s best golfers compete. This is not only a windfall for Augusta but also for the residents who want to earn tax free income.

The Augusta rule has been gaining popularity recently especially on apps like TikTok. Some Tiker Tokers (for you millennials out there) have been giving some shady tax advice. Specifically, tax advice related to renting out your home to your own business. Make sure to read my previous article if you’re wondering if you can rent to yourself.

Ok so what is the Augusta Rule (Section 280A)?

Section 280A(g) refers to a code section in the Internal Revenue Code (IRC) that allows taxpayers to exclude certain rental income. Specifically, the code states that if a “dwelling unit” is rented for less than 15 days then no income or deduction is reported.

The term “dwelling unit” includes:

  • A house
  • Apartment
  • Condominium
  • Mobile home
  • Boat
  • Similar property

This rule applies whether the property is the taxpayer’s primary residence or any other residence. This is especially useful for taxpayers who own summer homes that can be rented on a short term basis.

What are the TikTok tax ‘experts’ saying about the Augusta Rule?

There is no shortage of bad advice on TikTok, especially when it comes to taxes. Here’s what they are saying about the Augusta Rule:

“If you rent your home to your business for $1,000 per day for 14 days a year you can write off $14,000 a year without having to pickup rental income.”

Unnamed TikToker

There are several things wrong here and I’ll explain why!

You need to have a business.

Firstly, you need a legitimate business. Unfortunately, day trading on Robinhood on your spare time is not a business. If you’re thinking I can just “write it off” you will be sadly mistaken.

It needs to be a credible business expense.

Let’s say you actually have a business and want to try to take advantage of this loophole. You’re probably thinking, “I can just bring a client over for beers and pay myself $1,000 in rent”. No! This needs to be an actual business expense.

Without a written contract between yourself and your business you’ll have a hard time proving this deduction to the IRS. Additionally, the rent needs to be at a fair rental price. Can you actually rent out your dining room table for $1,000 for an hour meeting?

This doesn’t work for Schedule C businesses.

If you’re a sole proprietor or the sole owner of an LLC reported on a Schedule C then this trick doesn’t work. Single member LLC’s are disregarded for tax purposes so therefore you can’t rent to yourself.

Section 162(a)(3) of the IRC does not allow taxpayers to claim a rental expense for property for which they have an equity interest or title. Therefore, a taxpayer can’t take a rental deduction on their Schedule C and report corresponding rental income on their Schedule E.

But you’re probably thinking, “if it’s under 15 days then I wouldn’t need to report it on Schedule E anyway.” Although the rental was under 15 days it would have never been considered a rental in the first place. Remember, this transaction was done with a disregarded entity so the rental income and expense would be disregarded as well.

Speak with a real Tax Advisor

Before you go to jail for tax evasion – speak with a real tax advisor. “But I heard it on TikTok” is not a legal defense. This tax strategy may work for some but you want to clear it by an actual advisor.

If you want to rent out your place for a weekend then great! You can get some tax free income. If you’re trying to scam the system then think again!

Jeremias Ramos is a CPA working at a nationally recognized full-service accounting, tax, and consulting firm with offices conveniently located throughout the Northeast. Jeremias specializes in tax and business consulting with focus areas in real estate, professional service providers, medical practitioners, and eCommerce businesses.

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