To take advantage of the Augusta Rule, the right way, your property has to qualify as both a dwelling and a personal residence. It sounds straightforward, but there are specific definitions that matter. If you don’t meet them, the rule doesn’t apply.
In this video, tax attorney John Hyre breaks down:
What actually qualifies as a dwelling (hint: your tent in the woods probably doesn’t count)
What counts as personal use for IRS purposes (it’s broader than you think)
How co-owners, family members, even house-swapping and fundraisers play into your eligibility
Why it matters to meet both criteria—especially if you want that income to be tax-free
If you’re a business owner looking to legally lower your tax bill using your home, this is a must-watch.
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rental under the Augusta rule, it has to
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be two things. Well, two things, not two
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things. It has to be two things. A
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dwelling and a personal residence. We’re
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going to cover dwelling first, but
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remember, you have to meet both
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criteria. What’s a dwelling? A dwelling
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is a place where you can sleep, prepare
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meals, and well, um, get rid of the
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meals. So, it has to have cooking and
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toilet facilities as well as sleeping
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facilities. And it has to be real. The
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IRS is actually based on some old
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proposed regs that we’re following.
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Pretty liberal about it. But let’s not
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get crazy crazy. Maybe a little crazy,
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but not too crazy. For example, if you
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have a sleeping bag, a bucket, and an
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MRE from the military that you can cook
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on its own, and you throw it under a
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tent, is that going to qualify? That
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might be pushing it a bit. But they are
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pretty liberal. For example, it’s pretty
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clear that the code doesn’t require that
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you own it. I’m a believer as a tax
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attorney, if it’s not banned, it’s
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allowed. They never put a requirement
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saying you have to own it. So, if you
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rent, for example, an apartment. Can you
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rent it out for Augusta rule purposes?
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Yes, as long as it has what? Eating
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facilities, toilet facilities, and
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sleeping facilities. Finally, your home
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or condo might have more than one
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dwelling unit. For example, if you have
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the classic mother-in-law suite, what is
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that? It might be the basement. It might
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be part of the structure. It doesn’t
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have to be separate from the building.
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It could be a duplex, for example. But
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if you have, let’s say, in the basement,
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a separate place that has its own eating
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facility, toilet facility, sleeping
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facility, and it’s got a little bit of
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separation, a door or something that
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separates it from the other dwelling
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unit, the rest of the home. This would
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be your classic mother-in-law suite, you
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actually have two dwelling units in the
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same structure. So, for a property to be
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a legitimate Augusta rule rental, we
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need it to be a dwelling, but we also
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need it to be a personal residence. Now,
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to be a personal residence is really
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easy. And that’s on purpose because
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normally having a personal residence
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under the code section we’re dealing
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with is bad. We won’t get into why. It
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just has to do with limitations. If
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you’re renting the property out for more
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than 14 days per year, that’s not our
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situation. We’re going to be 14 days or
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less. So all these things that make it
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really easy to trigger personal use
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help us. What makes a personal residence
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a personal residence? For purposes of
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this rule, cuz I need to point out in
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the code they use the word personal
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residence all over the place and each
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time they define it differently. So this
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definition only works for the Augusta
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rule. What is a personal residence? You
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use it for 14 days or more per year for
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personal use. Let me repeat that. You
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use the property for 14 days per year or
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more for personal use. The obvious
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example of personal use, you stay the
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night. You stay 14 nights. You got your
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personal use. If it’s a dwelling unit as
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well, it’s Augusta eligible. There are
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other ways to qualify without you
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personally staying there. First one, if
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you have any co-owners. So, let’s say
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Bob and I, even if Bob and I are not
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otherwise related, for whatever reason,
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Bob and I own the property. It can be
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50/50, it can be 40, 60, it can be
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whatever. I use it for seven nights to
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stay at and sleep at Bob uses it for
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seven nights. 7 + 7 is 14. We got it
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because Bob’s use is treated as if it
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were my use. Likewise with family
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members. I could stay in the property 7
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days and my wife stays there 7 days. Now
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again, family is defined in the code
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probably in 27 different ways. So who’s
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family? For purposes of the Augusta
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rule, it’s going to be ancestors,
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descendants,
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spouses,
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siblings, and half siblings. So once
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again, whose family? spouses, ancestors,
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descendants,
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siblings, half siblings. If any of them
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use it, hey, I brought my sister over. I
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let her use it for 2 days. I used it for
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12 days. We got our 14 days. So, it’s
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really easy to get the personal use. If
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it’s used for charity or political
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fundraising, I have a beautiful house. I
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invited my party of choice over to do a
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political fundraiser. Maybe we did a
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charitable fundraiser. we had an art
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auction, whatnot, that counts as
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personal use. Uh swapping houses, there
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are apps online, there are websites
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where I have a beautiful house in the
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mountains of uh Ashland, North Carolina,
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and I swap it for use of a house in
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Paris, and the Parisian people come and
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use my house, that’s counted as personal
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use. In other words, I’m using their
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house in Paris. They stay in my house in
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Asheville. Their time in my house in
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Asheville counts as personal use. Why?
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Cuz I’m using their house in Paris. So,
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it’s really easy to get personal use.
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Let me give you another way. Anybody you
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rent to at below fair market value. Uh I
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got a bu I got a friend Ted and I rent
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to him at half. Why? Because anybody you
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rent to at below fair market value,
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personal use. So if I rent to Ted for 3
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days and to Bob for 3 days and then I go
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and use it for 8 days, we got our 14
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days. Now, when it comes to renting to
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someone else below fair market value,
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I’m pointing it out because that
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qualifies as a personal day and I want
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you to know the rules. Do I recommend
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you do that? No. Because it takes away
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from you the days that you can rent to
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your business. You can rent for up to 14
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days tax-free. The object typically is
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to rent to your business for those 14
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days. Let’s say you rent for 2 days to
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Bob below fair market value. You used up
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two of your 14 tax-free rental days. You
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may or may not want to do that. So, I
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just want to point out renting below
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fair market value helps you qualify as a
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personal residence, but you may not want
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to take that venue. Now, if you rent to
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family at full fair market value, it
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does not count as personal use. So,
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let’s say I rent to my daughter. She’s
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my descendant, so she would count as
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family under this definition. I rent to
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her at full fair market value. Does not
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count as personal use. So, be aware of
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that. Now, if I rent to her at below
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fair market value, if I rent to anybody
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at below fair market value, it counts as
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personal use. So, you take all these
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categories of personal use. Let’s review
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the categories. My personal use,
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personal use by family, renting it out
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to anybody at below fair market value,
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use for charity or political
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fundraising, use for house swapping, all
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of that counts as personal use. Use by a
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co-owner, all of that counts as personal
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use. Add it up. If it’s 14 days or more
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per year, you got yourself a personal
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residence. If it’s also a dwelling, you
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have an August rule eligible property.
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And by the way, this can work with more
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than one property. My wife and I stay in
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the vacation house for 14 days and we
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stay in the home for 14 days. Each one
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of those counts as a personal residence.
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You can have more than one. And for the
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Augusta rule, that may actually be a
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good thing. It opens up the ability for
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your business once they rent one of your
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personal residences for 14 days. If you
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can set up more legitimate emphasis on
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legitimate rental days, you can do it
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with other properties. We keep hearing
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14 days a lot. Let’s be clear. You can
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rent out an Augusta eligible residence.
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So, a personal residence that is also a
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dwelling. You can rent it out for up to
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14 days tax-free.
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But to make a dwelling into a personal
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residence, you need at least 14 days or
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more, and you typically easily get more
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of personal use. So the number 14 is
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just a coincidence. But remember, when
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you’re renting it out to the business,
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it’s up to 14 days. When you’re
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deciding, is this a personal residence?
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You need at least 14 days of personal
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use.
