What Is the 280A(g) Exclusion and How Does It Work?
Learn how the 280A(g) exclusion allows homeowners to rent their property for short periods without tax implications and the key requirements to qualify.
The IRS allows homeowners to rent out their property for a short period each year without reporting the income. This tax benefit, known as the 280A(g) exclusion or “Augusta Rule,” applies to short-term rentals for events, meetings, or temporary stays.
To take advantage of this rule while staying compliant, rental arrangements must be properly structured and documented.
Rental Arrangement Criteria
To qualify, the property cannot be rented for more than 14 days in a calendar year. Any income earned during this period is exempt from federal tax. The rental rate must reflect fair market value, aligning with what similar properties charge under comparable conditions. Setting an artificially low or high rate could lead to IRS scrutiny.
A written rental agreement should outline the rental period, rate, and any services provided. If renting to a business in which the homeowner has an ownership interest, the transaction must be conducted at arm’s length, with terms comparable to those offered to an unrelated third party. Payments should be made through traceable methods like checks or electronic transfers to establish a clear financial record.
Distinguishing Personal and Business Use
The IRS differentiates between personal and business use when determining eligibility for the exclusion. A residence is considered personal-use if occupied by the owner, their family, or anyone paying less than fair market rent. Business use applies when the property is rented under legitimate commercial terms, such as for corporate meetings or retreats.
To establish business use, the rental agreement should specify the purpose. If a company rents the home for an off-site strategy session, retreat, or client event, the agreement should reflect this. Supporting documents, such as an event agenda or meeting minutes, can further substantiate that the rental was for business purposes.
Homeowners renting to their own business must ensure the transaction is necessary for the company, the rate aligns with market conditions, and the payment terms mirror those of an independent transaction. The IRS closely examines related-party transactions and may disallow the exclusion if it determines the rental was structured primarily to avoid taxes rather than for a legitimate business need.
Accounting for the Exclusion
Since rental income under the exclusion is not taxable, homeowners should avoid mistakenly reporting it on their tax return. Including exempt rental revenue on a Schedule E or other tax forms could inadvertently subject it to taxation. Instead, homeowners should maintain internal records but omit it from their federal return.
Expenses related to the rental period cannot be deducted. Since the income is tax-free, costs such as cleaning, maintenance, or depreciation for the rental days are not eligible for deductions. Attempting to claim these expenses could result in disallowed deductions and potential penalties. Homeowners should separate these costs from deductible homeownership expenses like mortgage interest or property taxes.
State tax treatment may differ, and rental income could still be subject to state taxation. Reviewing state tax codes or consulting a professional can help avoid unexpected liabilities. Additionally, while the exclusion applies to federal income tax, it does not necessarily exempt the rental from local occupancy taxes or homeowners’ association rules that may restrict short-term rentals.
Required Documentation
Thorough documentation is necessary to substantiate the rental arrangement and ensure compliance. A detailed rental agreement should specify the rental duration, purpose, and payment terms. This contract should be signed by both parties and clearly outline any services or amenities provided.
Financial records must be meticulously maintained. Bank statements, payment receipts, and invoices should document the transaction. If payments are made electronically, retaining transaction details, such as confirmation emails or transfer records, can help establish an audit trail. For rentals involving a business entity, corporate financial statements or internal accounting records reflecting the rental expense can further validate the transaction.