The first full week of April brings the arrival of The Masters Tournament in Augusta, Georgia, where thousands of golf enthusiasts gather to attend one of the most famous sporting events in the world. Any other week of the year, Augusta is a fairly quiet southern city, but Masters week makes it a bustling city with many visitors who need a place to stay.
Fortunately, homeowners in the Augusta area open their doors to renters, and often make a significant amount of money in return. Thanks to the little-known “Augusta Rule,” these renters’ income is likely tax-free.
Here’s how the Augusta rule works and how you can earn tax-free income by renting out your home.
What is the Augusta Rule?
The Augusta Rule is an IRS provision that allows homeowners to rent out their home for up to 14 days per year without having to report the rental income received on their individual tax returns. The rule dates to the 1970s, when Augusta residents wanted to avoid tax complications when renting out their homes during the Masters.
Although the tax exemption is widely used in Augusta, it is available to everyone in the US and can be especially beneficial to homeowners in small towns where major events take place. Here you can find more information about how the exemption works:
- The property you rent must be a home, but does not have to be your main residence. That is why holiday homes also qualify for the exemption.
- If you rent the property for more than 14 days, you owe tax all of the rental income earned during the year.
- There is no income limit for the exemption.
- The days that the house is rented do not have to be consecutive. As long as the total number of days per year does not exceed 14, the income is exempt from tax.
- Business owners may be able to use the exemption to rent their home to their business for meetings, but make sure you keep detailed records for the IRS and charge a competitive rate based on the current market.
How to generate tax-free income by renting out your home
Many people want to invest in rental properties as a way to generate passive income. However, managing these investments can take a lot of work, so they may not be as ‘passive’ as people hope.
But if you don’t plan on turning your home into a full-time rental, the Augusta Rule can help you generate additional income that’s also tax-free.
Vacation rentals can be great candidates for this because homeowners spend most of their time elsewhere. Renting the property while you’re away can generate income that can help you pay for renovations, property taxes, or anything else you need. As long as you rent less than 15 days during the year, that rental income is tax-free.
Things to consider if you rent your home for two weeks or less:
- You will probably have to pay cleaning fees and possibly more than once if you have multiple tenants.
- Make sure your rental agreement states who is responsible for damage to your home or property.
- Check your homeowners insurance to see if your policy covers short-term rentals. You may need to purchase additional coverage or notify the insurance company of your plans.
An imbalance between supply and demand
A big part of the reason Augusta is such an attractive place for homeowners to rent is that the city doesn’t have enough hotel rooms to meet the demand during Masters week. This imbalance between supply and demand even caught the attention of legendary investor Warren Buffett in 2014.
“Augusta cannot scale its hotel industry to the Masters, and the Masters will not move,” Buffett told shareholders at Berkshire Hathaway’s annual meeting in Omaha, Nebraska. “There are certain events like this, but there aren’t many.”
Omaha faced similar challenges when it hosted the Berkshire meet, but that is largely a one-day event, while the Masters lasts all week, including practice rounds.
Prices for a weeklong Masters rental have increased over the years, and many Augusta residents can pay much of their mortgage and property taxes for the year with the rental income they earn during the Masters, says Stacey Hayden, vice president at Tournament Housing. & Events, a hospitality agency that matches renters with homeowners in the Augusta area.
Rental prices can range from about $4,500 to $150,000 per week, depending on the property, location and amenities, Hayden said. A typical 3.5 to 4 bedroom home might cost $10,000 to $15,000 or more, but homes with private bathrooms command a premium. Some commercial tenants may include groups of people who don’t all know each other, Hayden said.
Augusta schools all schedule spring break for the week of the Masters and even include the Monday after the tournament to accommodate families who have rented their homes for the week.
“The whole city is shutting down except for the Masters,” Hayden said.
In short
The Augusta Rule allows you to rent out your home for up to 14 days without reporting the income on your taxes. Smaller cities hosting major events are likely to benefit the most from the rule, as they can charge premium prices during the rental period. But the rule applies to everyone in the country and can be a way to increase your income without any tax consequences.
