The Augusta Rule: How to earn tax-free rental income

The first full week in April brings the arrival of The Masters Tournament in Augusta, Georgia, where thousands of golf enthusiasts will flock to attend one of the most famous sporting events in the world. Any other week of the year, Augusta is a fairly quiet, southern town, but Masters week turns it into a bustling city with many visitors who need a place to stay. 

Fortunately, homeowners in the Augusta area open their doors to renters, often earning a sizable sum in return for doing so. Thanks to the little-known “Augusta Rule,” the income generated from these renters is likely to be 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 their home for up to 14 days each year without having to report the rental income received on their individual tax returns. The rule dates back to the 1970s when Augusta residents wanted to avoid tax complications from renting their homes during the Masters. 

While widely used in Augusta, the tax exemption is available to anyone in the U.S. and can be particularly beneficial to homeowners in small cities hosting big events. Here are the details on how the exemption works:

• The home you’re renting must be a residence, but doesn’t have to be your primary residence, which means vacation homes are also eligible for the exemption. 
• If you rent the home for more than 14 days, you’ll owe taxes on all of the rental income earned during the year.
• There’s no income limit to the exemption.
• The days the home is rented don’t have to be consecutive, so as long as the total days doesn’t exceed 14 for the year, the income is tax-exempt. 
• Business owners may be able to use the exemption to rent their home to their business for meetings, but be sure to keep detailed records for the IRS and charge a competitive rate based on the current market. 

How to generate tax-free income by renting your home

Many people look to invest in rental properties as a way to generate passive income. However, these investments can require a lot of work to manage, so they may not be quite as “passive” as people hope.

But if you’re not looking to turn your home into a full-time rental property, the Augusta Rule can help you generate extra income that also happens to be tax-free. 

Vacation homes can be great candidates for this because the homeowners often spend most of their time someplace else. Renting the property when you’re not going to be there anyway could generate income that pays for renovations, property taxes or anything else you might need. As long as you rent for fewer than 15 days during the year, that rental income is tax free.

Things to keep in mind when renting your home for two weeks or less:

• You’ll likely need to pay for cleaning costs and possibly more than once if you have multiple renters.
• Make sure your lease agreement covers who is responsible for damages 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 make the insurance company aware of your plans.

A supply and demand imbalance 

A big part of the reason that Augusta is such an attractive place for homeowners to rent is that the city doesn’t have enough hotel rooms to meet demand during Masters week. This supply and demand imbalance even caught the attention of legendary investor Warren Buffett in 2014.

“Augusta can’t size its hotel industry to the Masters, and the Masters isn’t going to move any place,” Buffett told shareholders at the Berkshire Hathaway annual meeting in Omaha, Nebraska. “There are certain events like that, but there aren’t very many.”

Omaha has faced similar challenges when it hosts the Berkshire meeting, but that is largely a one-day event, whereas the Masters lasts all week including practice round days. 

Prices for a week-long Masters rental have grown through the years and many Augusta residents can pay a large portion 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 pairs renters with homeowners in the Augusta area.

Rental prices can range from about $4,500 to $150,000 for the week depending on the property, its location and amenities, Hayden said. A typical 3.5 to 4 bedroom house might go for $10,000 to $15,000 or more, but houses with en-suite bathrooms earn a premium. Some corporate renters might include groups of people that 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 that have rented their home for the week. 

“The whole town shuts down except for the Masters,” Hayden said. 

Bottom line

The Augusta Rule allows you to rent your home for up to 14 days without reporting the income on your taxes. Smaller cities that host major events are likely to benefit the most from the rule because they can charge premium prices during the time of the rental. But the rule applies to anyone in the country and could be a way to boost your income without any tax consequences.