A Tax-Free Way to Rent Your Home to Your Business (If You Follow the Rules)
07/21/2025
Ever wished you could get paid for all those times you’ve used your home for business? Maybe it was a weekend strategy session with your partners, a formal board meeting, or a special event to woo a new client. It turns out, you might be able to. There's a provision in the tax code, often called the "Augusta Rule," that allows you to do just that—receive tax-free income by renting your personal residence to your own business.
Sound too good to be true? It’s not, but it is one of the most misunderstood and, frankly, abused sections of the Internal Revenue Code. As with any potent tax strategy, the devil is in the details, and the IRS is exceptionally good at finding him.
Here at our firm, we guide small business owners and high-income individuals through the complexities of tax planning. We've seen the Augusta Rule used brilliantly to create legitimate tax savings, and we've also seen the disastrous aftermath when taxpayers get it wrong. Let’s break down what the Augusta Rule is, how it works, and how to use it without attracting the wrong kind of attention from the IRS.
What Is the Augusta Rule, Legally Speaking?
The "Augusta Rule" is the nickname for a particular section of the Internal Revenue Code (IRC). The name comes from its historical use by residents of Augusta, Georgia, who would rent their homes to visitors during the annual Masters golf tournament. The law was designed to provide a small tax break for homeowners who engage in very limited, short-term rentals.
Here’s what the code says directly:
"IRC § 280A(g) Special rule for certain rental use.—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—(1) no deduction otherwise allowable under this chapter because of the rental use of such dwelling unit shall be allowed, and (2) the income derived from such use for the taxable year shall not be included in the gross income of such taxpayer under section 61."
In plain English: If you rent out your personal residence for 14 days or fewer during the year, you do not have to report the rental income on your personal tax return. It is, for federal tax purposes, tax-free money. For the business owner, this presents a tantalizing opportunity: your business can pay you rent, deduct that rent as a legitimate business expense, and you, the homeowner, receive that income completely tax-free.
The Double-Sided Coin: Business Deduction and Personal Exclusion
The real power of this strategy lies in the two-sided benefit:
- The Business Deduction: Your S Corporation, C Corporation, or Partnership can deduct the rental payment as an "ordinary and necessary" business expense. This reduces the business’s taxable income.
- The Personal Income Exclusion: You, the individual shareholder or partner, receive the rental payment, and you exclude it from your personal gross income.
This effectively shifts money from the business (where it would be taxed) into your personal pocket (where it is not taxed). For example, if your business is in a 25% tax bracket and you execute a $10,000 legitimate rental under this rule, the business saves $2,500 in taxes, and you receive $10,000 tax-free.
A word of caution for sole proprietors: This strategy is generally not available if you operate as a sole proprietorship (filing a Schedule C). The law sees you and your business as one and the same, so you cannot legally "rent" to yourself. The business must be a separate legal entity.
How to Use the Augusta Rule Correctly: A Step-by-Step Guide
The IRS is highly skeptical of arrangements between related parties. When a business pays its owner for the use of their home, it’s a transaction that will be scrutinized if you are ever audited. To withstand that scrutiny, you must treat it as a formal, arm's-length transaction.
Step 1: Hold a Legitimate Business Event
The use of your home must be for a bona fide business purpose. This isn’t for your child’s birthday party or a casual get-together. It must be a legitimate business meeting or event. Examples include:
- Quarterly or annual board meetings
- Strategic planning sessions
- Client entertainment or meetings
- Team or staff training events
- A company holiday party for employees
The key is that the event must be "ordinary and necessary" for your business.
Step 2: Determine a "Reasonable" Rent
This is the single most critical—and most frequently botched—step. The rent your business pays you must be at a fair market rate. You cannot simply invent a number. The IRS and the Tax Court have made it abundantly clear that they will disallow deductions for unreasonable rent.
How do you determine a reasonable rate? You must do your homework and document it.
- Get quotes: Contact local hotels, event spaces, or conference centers and get written quotes for renting a space of a similar size and for a similar purpose. Save these quotes.
- Check online listings: Look at rates for comparable homes on short-term rental sites like Airbnb or Vrbo for the dates in question. Take screenshots.
- Consider the amenities: Is your home in a desirable location? Does it have features that a hotel conference room doesn't? Be prepared to justify the rate based on these factors.
A good faith effort to determine the fair market value is crucial. As we’ll see in a moment, failing to do this can be costly.
Step 3: Paperwork, Paperwork, Paperwork!
If you were renting a hotel ballroom, there would be a contract and an invoice. You must do the same when renting from yourself.
- Draft a Rental Agreement: Create a simple rental agreement between you (the homeowner) and your business entity. It should specify the date(s) of the rental, the business purpose, and the agreed-upon rental rate. Both you and an officer of the company should sign it.
- Issue an Invoice: As the homeowner, create an invoice and send it to your business for the rental.
- Pay from the Business Account: The business must pay you from its business bank account. Do not simply transfer the money. Write a check or process a formal ACH payment. This creates a clean paper trail.
- Keep Meeting Minutes: For any business meeting, you should have minutes. These should include the date, who was present, what was discussed, and any decisions made. This helps prove the meeting actually occurred and had a legitimate business purpose.
The Cautionary Tale of Sinopoli v. Commissioner
If you doubt the IRS’s resolve on this issue, look no further than the 2023 Tax Court case, Sinopoli v. Commissioner. In this case, the owners of an S corporation that ran several fitness centers decided to use the Augusta Rule. They held monthly "board meetings" at their homes and paid themselves between $3,000 and $4,000 per meeting. Over three years, the company deducted over $290,000 in rent.
The IRS audited and challenged the deduction. The taxpayers’ justification for the rent amount was flimsy—a rough calculation based on square footage. The IRS, however, came prepared. They researched local meeting spaces and determined that a reasonable rate would have been about $500 per meeting.
The Tax Court sided with the IRS. It found the taxpayers’ scheme was primarily a way to distribute earnings without paying tax. The court disallowed the vast majority of the rental deductions, allowing only the $500 per meeting that the IRS had established as reasonable. This resulted in a hefty tax bill for the business owners.
This case is a bright-line warning from the courts: get the rent wrong, and the entire strategy falls apart.
Common Myths and Mistakes to Avoid
- Myth: "I can rent my house to my business for 14 days every year, no questions asked."
- Reality: You can only do so if there is a legitimate business purpose for each rental day and the rent is reasonable.
- Mistake: Guessing at the rental rate.
- Consequence: As seen in the Sinopoli case, the IRS will disallow the deduction beyond what they determine is reasonable.
- Mistake: No documentation.
- Consequence: In an audit, an undocumented expense is an invalid expense. No invoice, no payment record, and no meeting minutes means no deduction.
- Mistake: Exceeding the 14-day limit.
- Consequence: If you rent your home for 15 days or more, all rental income for the entire year becomes taxable on your personal return (though you can then deduct related rental expenses). The tax-free benefit is completely lost.
- Mistake: Forgetting about state taxes.
- Reality: This is a federal rule. While most states follow the federal treatment, some may not. For instance, some states may require you to report the income and then take an offsetting deduction. It's crucial to check your specific state's tax laws.
The Augusta Rule is a powerful tool for the diligent taxpayer. It offers a rare opportunity to legally and ethically extract funds from your business on a tax-free basis. But it requires precision, documentation, and a healthy respect for the rules.
If you’re a business owner looking for sophisticated tax planning strategies that are grounded in law and can withstand scrutiny, our firm can help. We don’t just point out opportunities; we help you build the bulletproof documentation to defend them.
Sign up today for a FREE discovery call.
Greg Tobias, Enrolled Agent
Admitted to practice before the Internal Revenue Service
Sources:
- Internal Revenue Code § 280A(g)
- Internal Revenue Code § 162
- Sinopoli v. Commissioner, T.C. Memo. 2023-105
- IRS Publication 527, Residential Rental Property
- IRS Publication 535, Business Expenses
