Doctors’ biggest expense each year is hands-down taxes. That’s why lowering one’s tax burden is by far the #1 question or topic request that I receive from this blog. Thankfully, there are many ways for doctors to put together a tax strategy that can reduce their effective tax rate and save tens or even hundreds of thousands of dollars in taxes using a trusted tax advisor. Because you do need to pay all of the taxes that are legally due. But you don’t need to leave a tip. And one of the strategies that I use to reduce taxes is known colloquially as the Augusta rule.

Taken alone, the Augusta rule won’t reduce your taxes by a massive amount. But, put together in a thoutfll tax stagey, and it plays an important role.

So let’s take a close look at how this rule works and how doctors can use it.

What is the Augusta rule?

The Augusta rule or Section 280A(g) of the Internal Revenue Code says that homeowners can rent their home for up to 14 days each year without having to report that rental income on their tax return. So, essentially one is able to rent their home out for 14 days without that income being taxed.

A quick aside on the name

Certainly, “Augusta rule” is a much more catchy name than Section 280A(g) of the Internal Revenue Code. But where did this name come from?

It actually comes from the name of the city hosting the famous Masters’ golf tournament, Augusta, Georgia. This quiet town gets overrun with gold fanatics once every year and homeowners began taking advantage by renting their home out over the 2 weeks of the tournament and its run-up. And they were able to do this for quite a nice profit given the lack of temporary housing in the area.

Naturally, they wanted this income to be tax-free and this is what happened in the 1970s when this provision of the tax code passed. And in the process it became forever linked to Augusta.

How does the Augusta rule work?

Here’s a great breakdown courtesy of Bankrate:

• The home you are renting must be a residence. It can be a second home as well though. So it doesn’t always have to be your primary home. But, it can’t be an investment property.
• If you rent the home for more than 14 days, you’ll owe taxes on all of the rental income earned during the year.
• There’s no income limit to the exemption. So this exemption is available to high income earners like doctors.
• The days the home is rented don’t have to be consecutive. As long as the total days doesn’t exceed 14 for the year, the income is tax-exempt. 

And finally, (this is a big one for doctors)…

• Business owners may be able to use the exemption to rent their home to their business for meetings, but be sure to keep detailed records for the IRS and charge a competitive rate based on the current market. 

How doctors can use the Augusta rule to lower their taxes

There are a few different ways for doctors, and really any investor, to take advantage of the Augusta rule to lower their taxes. Let’s take a look at the most practical ones…

1. Actually rent your primary home out for 14 days or less

This is the original purposing of this provision in the tax code. And you certainly can use it this way. This is especially advantageous and probably most practical if you live in a city like Augusta. A city where there is a temporal and temporary influx on people needing housing and the local supply of short term housing, like hotels and STRs, just doesn’t exist.

If this doesn’t fit your situation, then it may not really work. You also may not be super keen to let potential strangers live in your primary home for 2 weeks. And charging relatives or friends can be kind of awkward…

2. Rent of a second home for 14 days or less

Let’s say you have a second home that you use only part time or in certain seasons. In that case, you could rent out that secondary home for 14 days or less to take advantage of the Augusta rule. This can seem a little more practical as having others stay in your second home is more palatable than your primary home.

The main problem here is that most second home owners will either want to use the home exclusively for themselves or use it as a short term rental. And using it successfully as a STR, along with benefitting from the even greater potential tax advantages of an STR, will require renting it out more than 14 days each year.

So, again, this particular use of the Augusta rule probably best fits those with second home who primarily use the property but don’t mind renting it put for 2 weeks at most and aren’t looking to turn it into a short term rental.

And this brings us to the last and probably most applicable utilization of the August rule to lower your taxes…

3. Renting your home to your business

Let’s take me as an example. I own a small business called The Prudent Plastic Surgeon. I, along with my wife Selenid, also own our primary home.

So, each year, we rent our home to my business for business meetings and activities. The rental income that we earn from my business is thus not taxed. And the money my business pays to rent the home is tax deductible as a business expense.

This is really a fantastic option for any physician with some sort of 1099 income, whether that is from private practice or a side gig like one of these vetted physician side gigs. It’s really a double whammy by creating tax deductible expenses for your business and tax-free income on the individual side of things.

In implementing this strategy, you do have to keep careful records of business meetings and activities as well as document the dates of rental. Lastly, you also need to make sure that you charge a reasonable market value rent. The #1 way to flag yourself for the IRS is to charge $10,000/night for renting your home.

However, follow the rules, and this is an excellent strategy to implement and lower your taxes on an annual basis.

Can the Augusta rule work for you?

I would argue that if you are serious about lowering your tax burden, there is a way for most doctors to take advantage of the Augusta rule.

It’s important to understand that this alone however, won’t make the biggest dent in your tax bill. In fact, few things alone really will. Just like implementing one investing strategy in isolation won’t lead you to financial freedom, you need to build a complete tax strategy plan (like a written financial plan for your investing strategy) to see major results.

Here are some additional resources to help you create a tax reduction plan:

• 5 Ways W2 Physicians Can Lower Their Taxes
• Real Estate Professional Status: Massive Tax Benefits for Physicians
• Should Doctors Invest in Real Estate Just for the Taxes?
• 3 Massive Ways Real Estate Tax Savings Can Backfire

And you can always consult with one of our trusted tax key resources here for help!

What do you think? Do you use the Augusta rule in your tax planning? Why or why not? Do you think it could fit for you in the future? Let me know in the comments below!