If you’re a small business owner, you’re likely aware of the home office deduction. But did you know there’s another tax break you can use that involves renting your home to your business?
In today’s post, I’ll tell you how to legally rent your home for tax-deductible business purposes.
How can I legally rent my home for tax-deductible business purposes?
Your business can rent your home under IRS Code Section 280A(g), which is often referred to as the “Augusta Rule,” “Masters Rule,” or the “14 Day Rental Rule.” This tax law allows someone who owns a personal residence to rent the space to a business and not pay taxes on the rental income as long as the home is only rented for 14 or fewer days during the year. This also means that the home cannot be used as your primary place of business in order to take advantage of this tax break.
So if you’re the homeowner and the business owner, then renting your home to your business means you save twice in taxes. First, you write off the business event or meeting as a business expense on your business tax return. Second, you receive the tax-free rental income as an individual. One thing to note is that you (as the homeowner) cannot deduct any rental expenses such as mortgage interest or property taxes when qualifying for this exemption.
As with all things IRS, there are several rules you’ll need to follow to keep this transaction legal:
- The home that you’re renting must be used as a personal residence the rest of the year.
- You must use the space for legitimate business purposes and not solely for entertainment. To prove this (if audited), it’s wise to have an agenda and keep meeting minutes.
- You must charge an appropriate amount to rent the space. In other words, you should charge the same amount that similar spaces in your area would charge to rent a space at the time of year you’ll be holding your meeting or event.
- Send an invoice to your business and make sure your business pays the invoice out of the business account.
- Your business must be an S-corporation, C-corporation, or partnership in order to qualify for this tax benefit. If you are a sole proprietor or own a single-member LLC, then you don’t qualify.
- You can’t use the home office deduction and rent that same home to your business in order to produce tax-free income.
Why would I rent my home to my business?
There are lots of legitimate business reasons why you may want to rent your home to your business. Think about any reason your business might have for renting an event space or coworking space from someone else. Some possibilities include:
- Board meetings
- Networking meetings
- Retreats
- Shareholder meetings
- Strategic planning meetings
- Team events
- Video production
Why is this tax law called the “Augusta Rule” or “Masters Rule”?
This tax rule originated when home owners in Augusta, Georgia lobbied to be able to rent their homes to people attending the annual Masters golf tournament without having to report that rental income on their annual tax returns.
Do the 14 days have to be in a certain timeframe?
No, the 14 days can be any time throughout the year, and they can be consecutive or sporadic.
Do I need to send myself a 1099 when I rent my home to my business?
Your business can issue you a Form 1099 for renting your home for tax-deductible business purposes. Additionally, if you use a service like AirBnb or Vrbo to list your home to rent to other businesses, then you’ll likely receive a 1099.
In either case, you’ll need to report the income on a Schedule E with your individual tax return. You’ll note on the form that the amount is tax-deductible income under IRS Code Section 280A(g). If you’re not sure how to do this, make sure you contact an accountant to walk you through the steps..
What qualifies as a home that I can rent to a business?
Many different types of properties such as houses, condominiums, boats, vacation homes, or mobile homes could qualify as long as the property is owned by an individual and used for personal use the rest of the year.
Abridged by Amy
If you aren’t taking the home office deduction and don’t use your home as a business throughout the year, then renting your home to your business for 14 days of the year is a great way to bring in some extra cash and save some money come tax time. Just make sure you have legitimate business reasons for renting your home and–as always–keep accurate business and accounting records in case the IRS needs to see them one day.
