Augusta Rule Gone Wrong. This is one of the most talked about, “Tax Secrets of the Rich!” I see from non-tax influencers on social media.
It’s the Augusta Rule - which allows you to not claim rental income on a property you own if you rent it out for 14 days or less during the year.
Apparently what the wealthy do, is they will have their business rent their property under this rule, thus getting a rental expense on the business side, and not having to claim income on the personal side.
Let’s be clear - this is a legitimate tax strategy when implemented correctly. This involves renting the property at a reasonable FMV, transferring the expenses in question, issuing a 1099-Misc for the rental payments made to the business owner, and reporting the income and Augusta Rule deduction appropriately on your Schedule E, which is part of your personal Form 1040 tax filing.
A recent tax court case that deals directly with the Augusta Rule and had #taxtwitter abuzz was Sinopoli v. Commissioner. In this case, the taxpayers used the Augusta Rule to expense $290,000 worth of rental expenses over three years through having monthly shareholder meetings in their homes.
The courts ruled against the taxpayers and disallowed the majority of the deduction for the following reasons:
The defendants couldn’t produce record of what business was discussed during these meetings; and
The FMV of the meeting spaces were much lower than the taxpayers claimed.
The IRS adjusted the rent to $500 for each meeting where they could produce evidence of what business was discussed - bringing the actual deduction to $10,500 for the three tax years in question, down from $290,000.
For the IRS, this case was a slam dunk. The rent charged was so egregious and the evidence the taxpayers had was so minimal, that it made me wonder why they even tried contesting it in the first place.
Avoid the headache and hire an educated professional: 808.546.5026 ext. 303 or firstname.lastname@example.org!