The Augusta rule explained: renting your home to your business

0:00 I sat down with a client business owner making $340,000 per year. Pays a CPA, they file on time, they do everything right. And yet never heard of section 280A. That one blind spot was costing him thousands of dollars every year in tax savings, and he just left that sitting there. And the wild part is is that the strategy involves his own house. It's the one he already owns, and it's the one that he's already paying a mortgage on. Today, I'm going to walk you through exactly how this works step-by-step. And we're going to cover what the Augusta Rule actually is and where it comes from. And I'm going to show you the math on how much you can pull out tax-free. And then we're going to get into the part that most people completely miss, which is how to document this so it's audit-proof. Now, that last last piece is everything because the strategy is totally legal, but the IRS does pay attention to how you execute it. If you're new here, my name is Preston. I work with high-income earners and business owners, typically anywhere from $100,000 to $400,000 and up. We've helped over 3,000 clients build $50 million in wealth over the past few years, and tax optimization is a huge piece of that. And the Augusta Rule is one of those strategies that I bring up with almost every business owner that I work with because the barrier to entry is so low. You just need to own a home and have a business entity that isn't a sole proprietorship.

0:54 The Augusta Rule comes from section 280AG of the Internal Revenue Code. It says that if you rent out your personal residence for 14 days or fewer per year, you don't have to report that rental income on your tax return. Literally zero. It doesn't show up on your 1040, it doesn't go on your Schedule E. The IRS treats it like it never happened. Now, this got its name for homeowners in Augusta, Georgia back in the 1970s. Every year during the Masters Golf Tournament, residents would rent out their homes to tournament goers for big money over a short period. They went to Congress and said, "Look, we're not running rental businesses here. We're renting our homes for a week." Congress agreed, and section 280A was born. Now, here's where it gets really interesting for business owners specifically. Your business can be the one renting your home. You hold legitimate business meetings, planning sessions, board meetings, team retreats at your house. Your business then pays your rent at fair market value, and the business deducts that as a business expense, which lowers your business's taxable income. And you knew the homeowner can receive that rental income completely tax-free under the 14-day rule. So, you're getting a deduction on the business side and then tax-free income on the personal side. Let me show you what this looks like with numbers. Now, I want to walk you through both sides of this transaction so you can see exactly where the tax benefit comes from. Let's say you own a nice home that has good space for hosting. You look at comparable meeting venues, hotel conference rooms, and also Airbnb rates in your area, And the fair market value comes out to about $750 per day. You hold a monthly board meeting at your house, that's 12 days used, that's $9,000 in tax-free income to you, and then your business deducts the $9,000.

2:07 Now, let's trace this through. On the business side, your S corp made, let's say, $300,000 this year. You pay $9,000 in rent to yourself. Your business's taxable income drops to $291,000. That $9,000 deduction saves the business roughly $3,300 in taxes at the 37% bracket. On the personal side, you receive the $9,000. Under the Augusta rule, that $9,000 is excluded from your gross income. You don't have to report it. You don't pay federal income tax on it. You don't pay state income tax on it in most states. And because it's rental income and not wages, there's no self-employment tax. There's no FICA, nothing. That money moved from your business to your personal account, and the IRS doesn't touch it. So, you saved about $3,300 on the business side from the deduction, and you received $9,000 personally that would have been taxed at your marginal rate if you'd taken it as a distribution or salary. Combined, you're looking at roughly $6,000 to $6,500 in total tax benefit, depending on your state. And that's for meetings you're going to have anyway, probably at some rented conference room. Now, scale that up. If you've got a higher end home and your fair market rate is $1,500 to $2,000 per day, 14 days at $2,000 is $28,000 tax-free. At a combined federal and state rate of 35 to 40%, you're saving $10,000 to $11,000 in taxes. And here's the thing, this is just one strategy. Once you start layering this on top of cost segregation on your rental properties, proper entity structuring, retirement account optimization, the QBI deduction, that's where you start sheltering $100,000 or more in income from taxes. The Augusta rule is just one of the easiest pieces to implement because you already own the home. You just need to use it correctly.

3:24 Now, when I was talking to this client, they said, "Hey, Preston, I already take the home office deduction." And that's great, but you need to understand that these two strategies don't play well together on the same property. The home office deduction says your home is your primary place of business. The Augusta rule says your home is a personal residence that you're renting to your business temporarily. Those are contradictory positions. If you try to claim both on the same property, you're giving the IRS reason to disallow one or even both. So, which one should you choose? The simplified home office deduction maxes out at $1,500 per year. That's $5 per square foot on up to 300 square feet. Even the actual expense method where you calculate the percentage of your home used for business usually lands somewhere between two and five thousand dollars for most people. And for the Augusta rule, at $750 per day for 14 days you're at $9,000. At $1,500 per day for 14 days you're at $21,000. For most business owners with a decent sized home, the Augusta rule wins by a wide margin. You run the numbers for your specific situation, but in my experience it's usually not even close. Now, one thing to note, if you have a separate dedicated office space in your home that you use daily and you also have a living room, dining room, or outdoor space where you host meetings, some tax professionals will tell you that there's a way to structure both. But that's a conversation to have with your CPA and not something that DIY off a YouTube video. I'm hosting a live masterclass this week where we're going to go way deeper on the Augusta rule and the other strategies I'm talking about in this video. Cost segregation, entity structuring, and how to stack all these together into a real plan. It's live, you can ask me questions, and we're going to cap attendance so I can actually help people. Link's in the

4:40 description if you're interested in that. Now, let me cover who can actually do this because there are a few hard lines. First, you need a separate business entity. This works for S corps, C corps, partnerships, and multi-member LLCs. It does not work for sole proprietorships or single-member LLCs that are taxed as a sole proprietorship. The reason is simple, you can't rent your house to yourself. You need separation between you and the business. Second, the home can be your primary place of business. We just covered that with the home office comparison. Third, and this is critical, you can't exceed 14 days. It can't be 15, can't be 14 and a half. If you hit day 15, all of your rental income for the entire year becomes taxable, every single dollar. It's an all or nothing cliff. So, my advice is to stop at 12 or 13 days and give yourself a buffer. And you can't just write yourself a check and call it a day. There has to be a real business purpose for renting the space. So, what actually qualifies? Board meetings and shareholder meetings, these are the most common and the easiest to defend. If your S corp has a board, those meetings need to happen somewhere and your home qualifies. Annual or quarterly strategic planning sessions, you bring your team together to review your financials, set goals, plan the next quarter, that's all totally legitimate. Employee training days, you're onboarding a new team member, or running a skill development session, that also counts. You can also host client presentations or advisory meetings. You can even do company retreats. Now, what doesn't count?

5:44 Having dinner with your spouse and calling it a strategy meeting. Or let's say you're working from your couch on a normal Tuesday and billing your business for it. Or if you're trying to host a Super Bowl party and writing an agenda after the fact. If your meeting isn't something your business would have paid a venue for, then it probably doesn't qualify. Now, this is the part where most people trip up because the Augusta rule is completely legitimate, but the IRS knows it gets abused. So, if you're going to try to do this, you need to treat it like the IRS is going to look at it because they might. Here's my documentation checklist. First is to get a written rental agreement in place before any rental takes place. It should spell out the rental rate, the dates, the purpose. It's a formal agreement between you as a property owner as the tenant. Second, every meeting needs an agenda and meeting minutes. Not some paragraph that says, "We talked about business stuff." Real agendas with real topics, real notes on what was discussed and what decisions were made. Keep an attendee list as well. Third is to establish a fair market value with comparables. You can go on Airbnb, Peerspace, or call local hotels with conference rooms. You want to get at least three comparable rates and save those screenshots or quotes. If the conference rooms in your area are $400 per day, charging $500 is going to be defensible. But, if you're trying to charge $5,000, that's not. The IRS treats for reasonableness, and inflated rates are the number one thing that triggers problems. Fourth, the payment needs to leave a paper trail. Your business writes a check or does a bank transfer to you personally. The memo should reference a rental, something like Section 280A rental March 15th board meeting. Don't just journal in your books, actual money needs to move.

6:58 Fifth, if your business pays you more than $600 total for the year in rent, a 1099 needs to be issued from the business to you. Now, you still don't report this as taxable income because the 14-day exclusion applies, but the 1099 needs to be filed. Let me run through the biggest mistakes that I see. The first mistake is copying what you saw on TikTok without understanding the rules. I see people renting their homes on their sole proprietorship charging $3,000 per night for a two-bedroom apartment and keeping zero documentation. The second mistake is treating the 14 days casually. Remember, if you host a two-hour meeting on a Tuesday, that counts as one full day. The IRS counts calendar days and not hours. Track this carefully. The third mistake is commingling personal and business use during rental periods. Let's say if your kids' birthday party happens to be on the same day as your board meeting, that's going to be hard to defend. The fourth mistake is not working with a CPA who actually knows the strategy. A lot of general practitioners have never set this up. You want someone who understands section 280A specifically that can make sure your documentation holds up. So, let's bring this all together. The Augusta rule, section 280AG, lets you rent your home to your business for up to 14 days a year. Your business deducts the expense, you receive the income tax-free, there's no FICA, there's no self-employment tax, there's no reporting on your 1040. You layer that on top of cost segregation and entity structuring and retirement optimization and you're looking at serious money sheltered. If you want to start implementing this, here's what I'm going to tell you to do this week. First is to look up comparable meeting venue rates in your area. You spend 15 minutes on Airbnb and Peerspace and see what spaces like yours rent for. That's going to tell you immediately whether the strategy is worth the $5,000 a year or $25,000 per year for your specific

8:16 situation. Now, if you want to help putting this together with a full wealth plan that stacks the Augusta rule with every other strategy available to you, I'm hosting a live masterclass this week. We're going to walk through the exact strategies that my team uses with clients earning $100,000 to $400,000 plus, including cost segregation, entity structuring, etc. I'll also be doing a Q&A session at the end where you can ask me questions directly. We're going to get into the real numbers. It's free to join, the link is in the description if you're interested. Drop a comment with your biggest tax question and if you know someone making $200,000 or more who's still just handing everything to their CPA and hoping for the best, then send them this video. Check out this video next that the almighty algorithm recommends and I'll see you in the next one.