Augusta Rule — Complete Practitioner Guide
How to implement IRC §280A(g) for your clients: the 14-day rule, documentation requirements, how to explain it in 60 seconds, and the three audit triggers to avoid.
What Is the Augusta Rule?
IRC §280A(g) — commonly called the "Augusta Rule" — allows a homeowner to rent their personal residence to their own business for up to 14 days per year without reporting the rental income on their personal tax return. The income is completely excluded from gross income under §61.
The business, in turn, deducts the rental expense as an ordinary and necessary business expense under §162. This creates a tax arbitrage: money moves from the business (where it would be taxed as business income) to the owner personally (where it is excluded entirely), generating a deduction with no corresponding income.
What Is the Augusta Rule?
IRC §280A(g) — commonly called the "Augusta Rule" — allows a homeowner to rent their personal residence to their own business for up to 14 days per year without reporting the rental income on their personal tax return. The income is completely excluded from gross income under §61.
The business, in turn, deducts the rental expense as an ordinary and necessary business expense under §162. This creates a tax arbitrage: money moves from the business (where it would be taxed as business income) to the owner personally (where it is excluded entirely), generating a deduction with no corresponding income.
"Notwithstanding any other provision of this section or section 183, if a dwelling unit is used during the taxable year by the taxpayer as a residence and such dwelling unit is actually rented for less than 15 days during the taxable year, then... the gross income derived from such use for the taxable year shall not be includible in the gross income of such taxpayer..."
The Mechanics: How It Actually Works
The strategy requires two separate transactions: a rental agreement between the business and the homeowner, and actual business use of the property. Both must be documented contemporaneously — not reconstructed at tax time.
Step 1: The business owner rents their personal home to their S-Corp, LLC, or C-Corp for a legitimate business purpose. Common uses include board meetings, strategy sessions, client meetings, and company retreats.
Step 2: The business pays fair market rent for the property. The rate must be what an unrelated third party would pay for the same space — not an inflated number designed to maximize the deduction.
Step 3: The homeowner receives the rental income but does not report it on Schedule E or anywhere on their personal return. It is excluded under §280A(g).
Step 4: The business deducts the rental payment as a business expense on its return (Form 1120S, 1065, or 1120).
Client profile: S-Corp owner, $400K business income, 37% marginal rate
Strategy: Rents home to S-Corp for 14 days at $2,000/day (comparable to local event space rates)
Business deduction: $28,000 (reduces S-Corp taxable income)
Personal income: $0 (excluded under §280A(g))
Net tax savings: $28,000 × 37% = $10,360 in federal tax savings
How to Explain This to Your Client in 60 Seconds
Documentation Requirements
The Augusta Rule is a legitimate strategy that becomes problematic only when documentation is inadequate. The IRS has challenged Augusta Rule deductions in cases where the rental rate was not substantiated or the business purpose was unclear. Proper documentation eliminates this risk.
Audit Risk and Red Flags
The Augusta Rule is not a gray area — it is explicitly authorized by statute. However, the IRS has successfully challenged implementations where the rental rate was not supported by comparable data or where the business purpose was not documented. The following factors increase scrutiny:
Implement the Augusta Rule in under 3 minutes with Kam Code
Kam Code is Uncle Kam's AI tax planning software. Enter your client's entity type, home state, and rental rate — and Kam Code generates the complete Augusta Rule implementation package: a pre-filled rental agreement, meeting agenda template, fair market rate documentation, the correct Schedule deduction entries, and every IRC reference your client needs to be audit-ready. No manual drafting. No missed steps. No liability exposure.
| State | Conforms to Federal | State Income Tax | Notes |
|---|---|---|---|
| California | Partial | 13.3% top rate | CA does not conform to all federal exclusions; consult CA FTB guidance |
| Texas | Yes | No state income tax | Full federal conformity; no state income tax benefit needed |
| Florida | Yes | No state income tax | Full federal conformity; no state income tax benefit needed |
| New York | Yes | 10.9% top rate | NY conforms to IRC §280A(g); state deduction also available |
| Illinois | Yes | 4.95% flat rate | Conforms to federal; full exclusion and deduction available |
| Washington | Yes | No state income tax | No state income tax; federal benefit only |
Related IRS Forms
The Augusta Rule does not require a separate form. The business deduction is reported on the business return; the personal exclusion requires no reporting. However, these forms interact with the strategy:
Frequently Asked Questions
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Book A Strategy Call With A Tax AdvisorFrequently Asked Questions
The effectiveness of most tax strategies depends on your marginal tax rate. Strategies like S-Corp election, QBI deduction, and retirement plan contributions become significantly more valuable when your taxable income exceeds $200,000 (single) or $400,000 (married filing jointly), where the combined federal and state marginal rate can exceed 40%.
Yes. Most tax strategies are designed to stack. For example, an S-Corp election reduces self-employment tax, the QBI deduction reduces income tax on pass-through income, and a defined benefit plan reduces AGI. The key is sequencing — apply strategies in the order that maximizes the total tax reduction.
The IRS examines returns based on statistical norms (DIF scores). Strategies that produce unusually large deductions relative to income — such as aggressive cost segregation or high retirement plan contributions — may trigger examination. Proper documentation, reasonable positions, and professional preparation significantly reduce audit risk.
State tax conformity varies significantly. Some states fully conform to federal tax law (including this strategy), while others decouple from specific provisions. California, for example, does not conform to bonus depreciation or the QBI deduction. Always check your state's conformity status before implementing any federal strategy.
The IRS requires contemporaneous records — documentation created at or near the time of the transaction. This includes receipts, contracts, mileage logs, time records, appraisals, and entity formation documents. The burden of proof is on the taxpayer in most cases, so thorough documentation is essential.
Most business tax strategies require self-employment income, business ownership, or rental property ownership. W-2 employees are generally limited to above-the-line deductions (HSA, retirement contributions, student loan interest) and itemized deductions. However, some strategies — like real estate professional status — are available to W-2 earners with qualifying rental activity.
Most tax strategies must be implemented before December 31 of the tax year. However, some have earlier deadlines — S-Corp election (Form 2553) is due by March 15, and retirement plan establishment may need to occur before year-end even if contributions are made later. Always confirm the specific deadline for each strategy.
Implementation costs vary. S-Corp election requires ongoing payroll ($500-2,000/year). Cost segregation studies cost $5,000-15,000 depending on property value. Defined benefit plans cost $2,000-5,000/year in administration fees. The ROI should be evaluated against the tax savings — most strategies pay for themselves many times over.