Rent Your House to Your Business: The 14-Day Rule
Understand the tax provision allowing business owners to pay themselves rent, generating a corporate deduction while receiving the income personally tax-free.
A provision in the tax code allows homeowners to rent their property for 14 or fewer days per year without reporting that rental income to the IRS. This rule, found in Internal Revenue Code Section 280A and often called the “Augusta Rule,” allows a business owner to rent their personal residence to their own company. The business can claim a tax deduction for the rental payment, while the owner receives this income tax-free.
Eligibility and Core Requirements
This strategy is available to owners of incorporated businesses, such as C Corporations and S Corporations, as well as partnerships. For these entities, the business and the owner are separate legal and tax-paying entities, allowing for a legitimate rental transaction. This structure is not effective for sole proprietorships or single-member LLCs taxed as disregarded entities, as the owner and the business are considered the same taxpayer.
For the rental to be valid, the use of the home must be for an ordinary and necessary business purpose. This means the expense must be common and helpful for the business’s operations, such as holding board meetings, strategic planning sessions, or employee training events. The amount of rent the business pays must also be reasonable and reflect the fair market rate for a comparable facility in the local area. Charging an excessive amount can be reclassified by the IRS as a disguised dividend or distribution, negating the tax benefit.
Required Documentation and Information
To substantiate the rental arrangement and defend against a potential IRS challenge, the following documentation should be maintained:
- A formal rental agreement executed between the homeowner (lessor) and the business (lessee). The contract should identify both parties, specify the exact rental dates, describe the specific business purpose, and state the agreed-upon rental amount.
- Corporate meeting minutes for S or C Corporations that formally document the board of directors’ or shareholders’ approval of the rental. The entry should detail the event’s purpose, location, dates, and cost, demonstrating the expense was an authorized act of the business.
- A clear financial paper trail. The homeowner should issue a formal invoice to the business, and the business must then pay this invoice using funds directly from its business bank account, as evidenced by a canceled check or bank transfer record.
- Evidence supporting the reasonableness of the rent charged. This involves collecting and saving proof of how the fair market rental rate was determined, such as screenshots of pricing for local hotel conference rooms, written quotes from event venues, or listings for comparable commercial space rentals.
Tax Reporting and Implications
From the business’s perspective, the rental payment is a deductible operating expense that reduces the company’s taxable income. The business will report this payment on the appropriate line for rental expenses on its annual tax return, such as Form 1120-S for an S Corporation or Form 1120 for a C Corporation.
For the homeowner, the income received is entirely excluded from gross income because the residence was rented for 14 days or less. The money is not reported on the individual’s personal tax return, Form 1040. If the home is rented for 15 or more days during the year, this exception no longer applies, and all rental income must be reported.