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Renting Your Home with The Augusta Rule
The Essentials – What paperwork do you need?
There is no “Augusta Rule IRS Form” to complete as part of your tax returns. Rather, your business should issue you a 1099 for the rental income it paid you. When you file your 1040, you (or your tax pro) should enter that rental income on Schedule E. Then you should include an offsetting deduction and a note explaining that, via IRC Section 280A(g), the income is tax-free.
The rest of the paperwork is for your records in the event of an audit, namely:
- A detailed explanation, including contemporaneous comps, of how you arrived at a rental value for your personal residence;
- A rental agreement;
- An Accountable Reimbursement Plan;
- Meeting notes;
- A rental invoice; and
- Proof of actual payment.
Why all the paperwork?
If the IRS audits, you’ll need all of the above – and quickly, in good order. And yes, it’s a pain. And yes, there are ways to make it much, much easier.
The norm (especially if “Tik Tok Advice” is concerned) is to simply have a “meeting” and cut a check from the business to the owner. Such arrangements die on audit.
Comps
We’ll get into more detail as to how these work in a subsequent article. For now it’s important to understand that obtaining & keeping credible rental values by looking at comparable properties (“comparable” = “comps”) is key. Those comps need to be done before the property is rented – procrastinating and doing them “later” equals “no tax deduction” in an audit – period. Likewise, if you are not willing to generate such comps at all (whether DIY or through us), then don’t bother with the Augusta Rule. You will lose and probably pay penalties in an audit. Simply put, accurate, contemporaneous, and recorded comps are an absolute must for success with the Augusta Rule.
The Rental Agreement
The rental agreement needn’t be a 20-page monster, but it should define the essential terms:
- Lessee & Lessor
- Rental dates
- Payment amount & due date
- Clear terms and conditions, such as “what is included in the rental and what is not”
A strong template that is modified each time you rent the property should suffice.
The Accountable Reimbursement Plan
This is not strictly required in all cases (it’s an important technicality in some situations), but it is a best practice in general. An Accountable Reimbursement Plan allows the company to reimburse employees for expenses incurred by the employees on behalf of the company (e.g., an employee pays for a business flight on her personal credit card, etc.). If the company has a plan it is important to actually follow it (e.g., submit receipts and a summary of expenses incurred in a timely fashion, etc.). Such a plan should be adopted by any business that ever reimburses employees or owners for any reason. In other words, each business should have such a plan (and be able to prove it was in place) even if the business never used The Augusta Rule. This is a one-time thing – once & done.
Meeting Notes
Meeting notes record what will occur and (especially) what did occur in the meeting. Using AI to record the meeting and then editing its notes is an efficient means of creating good docs. More importantly, the meeting should have serious substance. Entrepreneurs often complain about the need to plan such meetings…and yet, they often have such meetings informally. Our tax attorney co-founder, John, often tells clients to discuss what they normally discuss with business friends at lunch – just at the house, in a more formalized manner. For example, landlords will often discuss rental trends, contractors to use/not use, legal developments, etc. We are simply saying “do it at home, and take great notes”. In short, you probably already discuss significant business matters with peers (or engage in other activities that could be done at home, such as recruit clients, train staff, etc.). Just change how & where you do it a bit to get some extra write-offs.
Definitely include a list of attendees in the notes. That helps legitimize the event and provides “references” to prove that the meeting happened the way it was described.
If you use TheAugustaRule.com’s “Free Money” Plan we will collaborate with your designated team member to draft notes before your meetings and review and refine your meeting notes after each event. That way “it’s done” and it’s stored, ready for audit, without distracting you from your work.
The Invoice
When your business deals with you, the IRS is especially wary of “abnormal” business practices. Real businesses invoice their customers. You should invoice your business for rent that is due. In addition, those invoices help create a record of what occurred, when it occurred, and why it occurred.
Have an invoice template, there’s no need to reinvent the wheel for each meeting. Send it to your business on time each time – with our app, it’s an easy “click”, template provided & auto-filled to save time. The result is a time-stamped invoice, and another brick in the wall of evidence we are building to keep the IRS out.
Do you need a tax professional for your paperwork?
If you’re not using TheAugustaRule.com, then yes, we absolutely recommend that you hire a specialized tax professional to guide you through the proper application of the rule. In our experience, most tax pros (including tax lawyers) haven’t spent the research time needed to truly understand the rule, which leaves you exposed in the event of an audit.
With TheAugustaRule.com, you can follow a fast & smooth path to success based on deep research done by tax attorney, John Hyre. He even paid to pull the transcript (e.g., trial transcript, IRS & taxpayer briefs, etc.) of the one Tax Court case that directly addressed the Augusta Rule. He wanted to know why the taxpayer lost (lousy records) and what arguments the IRS made in its briefs that the court did not bother to cover in its decision. John has 30 years of experience, including appearing in audits and Tax Court for clients all over the US. He has a strong feel for how things actually work with the IRS. That’s why we are comfortable guaranteeing our claims (for clients). You may apply the rule with confidence.
In short, we think you DO need a qualified tax professional to truly get the Augusta Rule right. With TheAugustaRule.com, you benefit from the research & experience of a seasoned tax attorney. And it shows in our docs, educational releases, and guarantees – for far, far less than it would cost you to hire it done.
“But I got the internet! I got AI!”
The problem with the internet (and therefore with AI): TMI & GIGO – Too much information and garbage in, garbage out. So much of what is out there is flat out wrong. And because it makes someone money…repeated over & over. It’s your money (we ask for fairly little), your time (trying to sort through the TMI & GIGO), and your risk (with the IRS), so…your call.
With TheAugustaRule.com, we make it easy. And your paperwork was created by a seasoned expert who dug deep. And we back up our work by guaranteeing to defend it in an audit.
Do you need to keep your paperwork up-to-date?
Yep. If rental rates change in your area, you’ll need to be on top of that. Which means you’ll also need to update the financial segment of your standard rental agreement, plus your standard invoice templates (or have it all done for you).
Paperwork doesn’t have to be a pain
Take it from one guy who deals with paperwork for a living, and another guy who has mastered the art of automating his businesses’ paperwork. TheAugustaRule.com is like having a pocket-sized tax specialist guiding you through all your documentation – and saving you from the time & tedium of DIY.
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