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Now on to the tax loophole.
Leasing out a property piece can be an excellent way to make a little extra money throughout the year. Indeed, if you have a long-term tenant in place, you can end up with hundreds or even thousands of dollars going into your bank account each month.
Unfortunately, however, when you generate income through long-term rentals such as this, the IRS will eventually want their slice. Of course, you can usually work with your accountant to deduct expenses such as repairs and maintenance to reduce your tax liability. Still, you will eventually need to pay on the net profit.
Though there is little that you can do to escape the IRS when leasing on a long-term basis, things can be very different if you rent out your property for just a few days a year. Tax legislation, known to real estate CPAs across the country as the "Augusta Rule," allows you to possibly exclude up to 14 days of rental income from your taxes each year.
You may be able to rent out your home without needing to pay taxes on the money earned. There are several situations and scenarios where this rule may come in useful. However, the most common uses that our team of we see regularly:
Airbnb Rental Investment Properties
The Augusta Rule can prove to be particularly helpful if you plan on renting your home out on a platform such as Airbnb for just a few days during the year. For instance, if a significant event such as the Super Bowl or Comic-Con is taking place in your city, you may decide to rent out your home (or a few rooms in it) to individuals or groups visiting your town to attend the event.
If your home is close to the location where the event is happening, you may be able to make a significant amount of income over just a few days. Thanks to the Augusta Rule, you may not need to pay any taxes on this money - though it is always a good idea to consult with our knowledgeable accountants first to make sure that this applies to you.
The Augusta Rule can also be instrumental if you own a separate business from your rental property.
The rule allows you to rent the home to the business for a meeting or conference instead of having the business at a restaurant or hotel conference room.
According to the IRS topic number 415 (renting residential and vacation property), the business can usually pay you for the use of your property and make the associated deductions to reduce its tax liability.
Simultaneously, the Augusta Rule means that you should be able to exclude that income from your income taxes at the end of the year - as long as total rental time remains under the 14-day threshold. As always, you should consult with us before making any financial decisions.
Book your free tax planning assessment here
Miguel A. Palma, CPA, PFS, CGMA
Founder of Palma Financial Services, Inc.
Palma Financial Services, Inc. ("PFS")has helped small business owners minimize income taxes and build wealth since 1998.
PFS has achieved positive results for its clients, but our top clients' successes are not typical. Because past performance is not a predictor of future success, you may have more or less success depending on many factors, including your background, experience, work ethic, client base, and market forces. Additionally, at times we may discuss the law or new and pending legislation. Please know our understanding of it is continuously changing. You cannot and should not rely upon these communications for legal, financial, or accounting advice. For the latest updates, set up a time here.