April means spring has truly arrived. For golf fans it also means - The Masters is here. Many golf fans may make the pilgrimage to this prestigious golf tournament for this week. Many property owners in Augusta, Georgia and the surrounding area may benefit from the rental income they are able to capture - but not just in the rents they may receive, but in the rents they may be able to keep. This is because of a lesser known rental income rule known as The Masters Rule (also frequently referred to as The Augusta Rule) which can help certain owners of real property exclude rents received from their taxable income, if they meet certain conditions. Though tax season is winding down, this doesn’t mean that tax planning should necessarily stop and the Masters Rule is a prime example.

The Masters Rule

The Masters Rule - which stems from Internal Revenue Code section 280A(g) - is a unique rule in which homeowners that rent out their property for 14 days or less in a tax year are not considered to be engaged in the activity for profit. This means that any rental income received from a property in which it was legitimately used for rental purposes for 14 days or less during a taxable year may be excluded from taxable income for Federal income tax purposes. State rules may differ.

This seemingly arbitrary rule gets its name from The Masters Tournament - one of professional golfs four major championships, always held at Augusta National Golf Club in Augusta, Georgia. The tournament is known for attracting thousands of golf fans to Augusta each April for this first major championship of each year. As a result, local property owners are able to rent out their residences for a high fee given such high demand. In the age of AirBNB engaging in such a rental activity is also easier than ever for both owner and tenant - making this tax planning rule more relevant than ever. In some instances in Augusta, property owners are able to receive a significant sum of rental income for renting to tenants for the one week of the year the Masters occurs. Given the profile of the event and the guests The Masters Tournament can attract, some property owners are able to generate tens of thousands of dollars of rental income for this single week. Due to this quirky tax rule, those property owners may be able to avoid including any of the rents received in their taxable income, regardless of the amount.

This rule however is not exclusive to Augusta, Georgia and is available to all US taxpaying property owners. For example, if Jack and Jill Taxpayer own a home in a seasonally popular city, they could conceivably rent it out for two full weeks, earning several thousand dollars on the rental and yet never have to report or pay income tax on the rents received. It should be noted however that while you don’t have to report income if qualifying for this rule, you aren’t allowed to take a deduction for expenses incurred either as if the activity was a full rental. Many taxpayers however may still be able to deduct mortgage interest expense and property taxes paid on their Form 1040 if other conditions are met. The federal governments feelings towards this are that 14 days or less is generally incidental, a hobby, and does not rise to the level of a trade or business for which regular rental activities must be reported for income tax purposes.

The 14-day rule however is strictly enforced and if a taxpayer rents their property to tenants for more than this period of time, a series of additional tests to determine the appropriate reporting and usage of the property must be conducted each year. This will often lead to additional tax reporting obligations and calculations to properly report income and expenses arising from the rental activity. If you own several properties, keeping them properly segregated from a business, operational and reporting perspective may help allow you to engage in a for-profit activity with one property while still potentially leveraging the Masters Rule for the other while complying with applicable tax law.

Real estate has long been an attractive investment option to many for its unique deductions and ability to earn a passive income stream in a diversified asset class. The 14-day Masters Rule however is not exclusive to real estate investors but to anyone that rents their property for 14 days or less. Be sure to keep accurate and detailed records if you were to consider implementing this strategy for tax or financial planning purposes. All taxpayers interested in this rule should engage a tax or financial professional with questions on this or other real estate investing rules before implementing such strategies.

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