Barely five years ago, in September 2018, a Chinese company named ByteDance rolled out a video-sharing social media app called TikTok. The company’s Chinese origin has caused headaches around the globe, with concerns that they might pass sensitive user data to the Chinese government. Afghanistan, Pakistan, India, and Montana have banned the app entirely, while a dozen other countries, including the U.S., have banned it from government devices. Despite those concerns, the app has over one billion monthly users.
But hey, security be damned—anyone selling anything wants to capture those two billion eyeballs. Naturally, that includes tax pros. Many of them have uploaded videos discussing a little-known strategy called the “Augusta Rule.” It’s also a popular topic on Facebook and Instagram. (It might be popular on Twitter, too, but who would know?) And that raises the question, can you really trust your tax planning to a social media video sandwiched between twerking monkeys and lip-syncing teenagers?
The Augusta Rule takes advantage of code section 280A(g), which says you can rent your home for up to 14 days per year without owing tax on that income. It got that name because homeowners in Augusta, Georgia, can make some nice tax-free coin renting their homes for the Masters golf tournament every April. But you can use it anywhere there’s demand for your house. If there’s a golf tournament, Super Bowl, or Olympics rolling into town, knock yourself out! And there’s a special angle that thrills the TikTok crowd. You don’t have to rent your house to a bunch of out-of-towners who trash your couch and spill red wine on your carpets. You can rent it to your own business—for bona fide business functions, of course—to turn taxable business income into tax-free rent.
Now, does the tax code really say you can rent your house to your own business? Well, it doesn’t say you can’t. So, for years, the Augusta Rule has been one of those strategies with no explicit IRS support. However, two recent Tax Court decisions affirm that it’s kosher, so long as you dot your i’s and cross your t’s.
In August, the Tax Court issued an opinion in a case involving three partners operating a chain of Planet Fitness locations. They used the rule to deduct an average of $2300 per day for each of their three homes over a three-year period. The frontline auditor who examined their returns determined that $500 was more reasonable and allowed it where the taxpayers had properly documented the meetings. The court upheld the auditor’s decision. Many “glass-half-empty” observers see the decision as an IRS victory because the taxpayers lost most of their Augusta deductions. But the “glass-half-full” crowd gets it right. The taxpayers didn’t get the rule wrong. They just didn’t follow it right.
Last month, the court issued a second opinion in a similar case involving an engineer and his two sons, who deducted up to $2500 per day to rent their homes to their marketing business. The planner who recommended it warned they should support their rental rates with independent comps within a 100-mile radius and urged them to engage an independent appraiser to value them every three years. But the taxpayers skipped that step and lost all of their Augusta Rule deductions. Again, the problem wasn’t a bogus strategy; it was bogus execution.
So, social media fans, what have we learned today? Tax deductions are great, even if you learn about them on social media. No boring law books required! Just make sure you can document why you’re entitled to the deduction and why you’re entitled to the amount. We’re here to help!