374. How People Make $50K Tax-Free Renting Their Home (Augusta Rule)

Summary

Podcast Summary

Podcast: Tax Smart Real Estate Investors Podcast
Episode: 374 – How People Make $50K Tax-Free Renting Their Home (Augusta Rule)
Date: April 21, 2026
Host: Hall CPA (Tom)
Guest: Nate
Main Theme: How real estate owners and investors can legally earn up to 14 days of tax-free rental income via the “Augusta Rule” (a.k.a. the Masters Exemption), with a focus on event-driven and business uses, and common pitfalls and misconceptions.

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Episode Overview

This episode unpacks the “Augusta Rule” (Masters Exemption)—a provision in the U.S. Tax Code that allows homeowners to rent out their primary residence for up to 14 days each year without having to report the rental income or pay taxes on it. Hosts Tom and Nate explore its origin, who qualifies, best use cases (including leveraging major events like the Masters Golf Tournament and upcoming World Cup), common misunderstandings, the limits of business use, and actionable warnings for real estate investors. The episode closes with a brief audience Q&A on removing properties from S Corporations.

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Key Discussion Points & Insights

1. What Is the Masters/Augusta Rule?

• Definition: Allows homeowners to rent out their residence for up to 14 days per year tax-free. This income doesn't need to be reported, nor are associated expenses deductible.
• Origin: Resulted from the Tax Reform Act of 1976, specifically section 280A(g), targeting Augusta, GA homeowners during the Masters Tournament.
  • Memorable quote:
    "The masterminds behind the Augusta Rule just wanted to not pay taxes for the two weeks of the Masters in their backyards." — Nate [03:17]

2. Who Qualifies?

• Personal Residence – Key Criteria:
  • Must be a property you use personally for at least 14 days/year or 10% of rental days, whichever is greater.
  • Not applicable to pure rental properties (i.e., pure investment short-term rentals).
• Misconceptions:
  • Many believe any rental property qualifies; it must be your residence under tax code definitions.
  • Renting to your own corporation for meetings has limited value and is often overhyped.

3. How to Use the Rule Effectively

• Ideal Use Case:
  • Rent your home during high-demand events (e.g., Masters, Olympics, World Cup, Super Bowl) and pocket up to $50K (or more) tax-free if market demand supports it.
  • Example: Augusta, GA owners make $10K–$25K for one week during Masters, tax-free [13:15].
  • You must keep total rentals within 14 days per year.

Case Study: Major Sporting Events ([13:15]–[17:36])

• The hosts suggest leveraging the Augusta Rule as cities like LA, Miami, Atlanta, Houston, etc., host major events such as FIFA World Cup (2026) and 2028 Olympics.
• Market dynamics let you price much higher than usual; sometimes $40K–$50K for a brief stay.
• Caution on city-specific short-term rental restrictions—do your homework.

Other Scenarios:

• "If you live in a vacation destination or have a beach house, you can use peak season rentals to maximize the Augusta Rule." — Nate [17:51]
• Plan around events or peak vacation time and limit renting to 14 days.

4. Common Pitfalls and Myths

• Pitfall 1: Miscounting Days

  • Stay strictly under or at 14 rental days; on the 15th day, all income becomes taxable. [18:32]
  • "If you rent out for 15 days, now all of a sudden that becomes taxable." — Tom [18:32]

• Pitfall 2: Misapplying to Investment Properties

  • If not a residence (little or no personal use), the Augusta Rule does not apply.
  • For "short-term rental loophole" strategies (i.e., active short-term rentals for tax-advantaged depreciation), Augusta Rule is unavailable—select your strategy accordingly.

• Business Use Is Overstated

  • Renting your own home to your business (e.g., board meetings) has marginal benefit.
  • Overuse, overpricing, or weak documentation can trigger IRS scrutiny.
  • "People really sweat trying to do this for their company. Often, it's not worth the squeeze unless it's a legitimate, documented business event." — Tom [07:51]

• Overstating Fair Market Rent

  • Trying to inflate the rental price for business bookings beyond local hotel/conference rates can get you in trouble.
  • "I've only seen it make sense once, for a Beverly Hills mansion with real, comparable rates. For 99% of people, it's not that valuable." — Nate [09:00]

5. Upcoming Opportunities

• 2026 FIFA World Cup: Cities across the US hosting; high demand means big income potential if you qualify and act fast [10:31].
• 2028 Olympics, LA: Advance planning could secure peak rental rates.
• Annual Events: e.g., Super Bowl, College Football Playoffs, March Madness, PGA rotations—be aware of event schedules.

6. Practical Advice & Best Practices

• Always check local laws and HOA/condo rental restrictions before planning.
• Document all rentals, keep contracts, and substantiate fair market rates if renting to your own business.
• Decide on your property’s status (personal use, investment, short-term rental), and design your strategy accordingly.
• "If you're using the short-term rental strategy for tax write-offs, you can't also use the Masters exception." — Tom [20:35]

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Notable Quotes & Timestamps

• On Loopholes vs. Written Law:
  "The master exemption is not a loophole. It's explicitly written into the tax code ... a loophole is an unintended consequence." — Tom [02:44]

• On maximizing the rule:
  "People in Augusta are pulling $10-25,000 for only one week, completely tax free!" — Nate [13:15]

• On the business use myth:
  "Is the juice worth the squeeze? Often, sophisticated investors would be better off spending their time elsewhere rather than jump through hoops renting to their own business.” — Tom [07:51]

• On pitfalls:
  "Once you hit that 15th day, all bets are off—the entire amount becomes taxable income." — Tom [18:32]

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Audience Q&A: Rental Properties in S Corporations ([22:21]–[27:39])

• Question: What's an effective way to get a rental property out of an S Corp?
• Short Answer: There’s “no good way out” once a property is in an S Corp. Distribution usually triggers taxable gain (often ordinary income), and reorganization options are narrow—best practice: "Don’t put rental properties in S Corps.” — Nate [22:21], Tom [22:57]
• Options if property is already in S Corp:
  • Distribute and pay taxes (“bite the bullet”).
  • Wait until inheritance/estate step-up if possible.
  • Liquidate/defer only if large offsetting losses available (rare).
  • Seek professional advice for any case-specific creativity.

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Action Items and Takeaways

• Real estate owners in high-demand locations: Evaluate if you can leverage the Augusta Rule during major events or peak vacation seasons (and do it properly).
• All listeners:
  • Don’t confuse the Augusta Rule with investment property loopholes—pick the strategy that aligns with your property usage.
  • Check all local restrictions before listing your home.
  • Keep rental periods under 14 days to retain tax-free status.
  • Renting to your own business must be legitimate and market-rate to survive IRS review.

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Next Episode Teaser

Deeper dive into extracting rental properties from S Corporations and more strategies around entity structuring for real estate investors.

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Useful Timestamps:

• [02:07] - “Loophole” debate and rule origin
• [05:10] - What’s a “residence”?
• [07:51] - Business use: Overrated or not?
• [10:20] - World Cup/major event opportunities
• [13:15] - Augusta (case study) – real numbers
• [18:32] - 14-day rule: Go over, pay tax
• [22:21] - S Corp Q&A: don’t put property in!

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Tone: Practical, no-nonsense, and occasionally irreverent—geared toward active investors, with a healthy dose of myth-busting and focus on actionable, defensible tax strategies.

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For more resources and to explore consultation options, visit www.therealestatecpa.com/Podcast.

Transcript

[Tom]

You're now listening to the Tax Smart REI Podcast, the number one tax podcast for real estate investors,

[Podcast Host]

your source for all things real estate accounting and tax. Here we reveal our secrets that can save you thousands in taxes, streamline your accounting process, and help grow your business. Stay tuned to hear insightful interviews with industry experts, successful real estate investors, and current clients on what strategies they use to grow their business and how they steer clear of Uncle Sam.

[Tom]

Hey everyone, thanks for tuning into this week's episode of the Tax Smart REI Podcast. Today we're going to be talking about the Master's Rule, or the Augusta Rule as it's often referred to. And long story short, that's your ability to rent out your home tax free. So we're going to be getting into all those details. It's going to be applying to short term rental operators, landlords, and even people who own primary residences. We'll be going through how the Master's exemption came to be, what potential opportunities you might be able to have to take advantage of the Master's exception, and also the do's and don'ts and discrepancies and mistakes and myths we see around this strategy. We'll be diving into all that in just one minute. If you own short term rentals or you're thinking about investing in them, this is worth paying attention to. A lot of investors miss out on tax savings simply because they don't fully understand how the short term rental tax rules work. That's exactly why we put together our Short Term Rental Tax Strategy bundle. It includes a short term rental tax strategy white paper that explains the rules in a clear, practical way. We also included a material participation guide to help you better understand how to qualify for the tax treatment many investors are aiming for. It's designed specifically for short term rental owners with straightforward guidance on how you can actually use it. If you want to get a better handle on how this strategy works and whether it applies to you, check it out. Go to www.therealestatecpa.com str tax bundle to get the short term rental tax bundle today. You can also check it out using the link in the show notes this episode. That's all for now. We'll be diving right back into today's episode. All right, and we are back. So, Nate, we're here to talk about the history of the Master's exemption and how everybody listening might be able to take advantage of it in their own situations.

[Nate]

Yeah, Tom, so in my personal opinion, there's a lot of things people call tax loopholes. I normally like, eh, I don't know if it's actually a tax loophole. Maybe it was intended by Congress, maybe it wasn't intended by Congress. But there's a lot of times there's not a loophole. However, I think the Masters is actually the legit loophole.

[Tom]

Yeah. You know, first thing real quick about loopholes. So I recently listened to a podcast or started listening to it where they're talking about there is really no tax loopholes. And I don't know that I 100% agree with that. A lot of times people misconstrue the word loophole for something that they just they've never heard of before or just seems contrary to their understanding of the tax code.

[Nate]

Right.

[Tom]

The master exemption is not a loophole. It's explicitly written into the tax code. Right. And is available for people to use. A loophole is an unintended consequence of a set of laws. Right. That is the difference between a loophole and just a strategy that you may never have heard of before. So I think people sometimes throw around the nomenclature. They do a little bit or try to get that off. But anyway, I'll get off my loophole soapbox here and we could dive into what is a legitimate exception explicitly written into the tax code that is known as the Master's exemption. Or some people may know it as the Augusta Rule.

[Nate]

Right. And like, what's funny about it, Tom, is it like kind of just came out explicitly for these search certain group of people. Right? So obviously the Masters is a tradition like none other, Right. It's been around. It's been around for forever and ever and ever. And so thousands of people have been going to it just for so long and over years. The residents would be like, great, for two weeks I can literally cover my mortgage, get everything paid off, and then I can then like just leave for two weeks. So I have to do just leave for two weeks. So people stay here. Whether it's be. If you got a super nice mansion, hey, you might have some golfers that want to come stay at your place. Are people just coming to visit to just see everything? Vendors, who knows? It's a massive commerce event for two weeks. And so they rent their home out. And then all of a sudden by the 1970s, people going, wow, I'm kind of getting taxed on a lot of rent here, Tom. Like, hey, you know, I know. So and so in the country club has got a buddy that can help us that like, maybe, maybe we can talk to them about figuring out how to make this tax Free. And they go, oh yeah, everyone has that same idea. And they go. And then they all have a meeting with his office. They hey, take him out to a round of golf, right? They do, they do whatever. Yeah. And so they say, hey, you know, is there a way we can make this tax free potentially? And he goes, oh, I don't know, it'd be really difficult. And they said, well, keep trying it, I hope you enjoyed that lunch. Right. And they go, yeah, yeah, of course. Then we have the tax Reform act of 1976 which introduced 280 Cap A Enter Revenue Tax through the tax code. So 280 Cap A was primarily meant to like cap off home, office and vacation home deductions. That was its original intention. But then of course there's this little 280 cap, a little G that gets tagged in there that's in a minimis rental exception. What does that mean? Well, that basically means if you rent your day for 14 days or less, that means that all of that income is tax free.

[Tom]

Right.

[Nate]

So basically the story is it was all specifically done for. I'm sure there were other people that were considering and asking for this and you know, there's some nomenclature that kind of like talks about making sense, but really it was kind of like we like to point to the Augusta people and saying, hey, this is why this exists for people. And with 14 days or less. Right. That's why we call it the master's exception. So effectively, if you rent your property, your personal residence for 14 days or less. And what is a personal residence? Tom?

[Tom]

A personal residence is a home that you live in for greater than 14 days or 10% of the time rented. So to be clear for everybody tuning in here, this is for residences, this is not for rental properties. So there's a lot of discrepancies or misconceptions we've seen from other CPAs when it comes to this in the short term rental loophole. So maybe it's a good juncture just to clear that up, Right?

[Nate]

Yeah.

[Tom]

If you have a, if you buy a property, it's not your residence, right? Meaning you're not living it for more than 14 days or 10% of the days rented, then it's a business property or an investment property potentially. Right. So if you rent out your short term rental for seven days or you rent it out for 13 days, two stays of, you know, 16 and 1 7, right. And there is no personal use, you do not meet the criteria for it to be considered a residence, then it's Not a residence. And you could still use the short term rental loophole, just to be clear, because a lot of literally had questions multiple times from CPAs saying, oh well, they rented it out for less than seven days. That means they just don't report it on your tax return. And that's true when it's a residence. Again, that's true when it's a residence. But if it's not a residence, then that's not true. I hope that makes sense.

[Nate]

Yeah, I think so Tom. So it's basically like, look, if you have a short term rental and you get to first year of operation and you don't rent it out, really, and you have, like you said, if you, if you've not stayed there more than 14 days, right, then you got to report it because on your schedule E, that's still a reporting requirement here. Now if, let's say that you live near the beach or some destination location, right, Something like that. And then you decide saying you're going to go on vacation for two weeks and you go, eh, there's a big event coming in my town once a year, something like that. You go, I think I could make a little like actually I've never thought about this. Our house is pretty close. It's nice enough or we can get it nice enough. And so then you decide to rent it out for X number of dollars. You could take all that tax free and you don't report it on your tax return. Right. And so people just love hearing about the strategy. I feel like. Tom, so that's why I honestly like you and I get this question so often. It's like, how can I use the master's exception for my own house, right? Can I rent it to my corporation? Can I do this right? And it's like you're really not creating a lot of tax savings for yourself. It's like it's really primarily for those folks who live in what we call vacation destinations. Would you agree with that?

[Tom]

Yeah, I would agree with that. You know, this is one of those, I think this is a strategy that's often overhyped, at least as it relates to business use of this. You'll hear all the people, oh, we're going to rent out our, our property to our s. Corporation, to our business or whatever for some retreat. And you know, they end up saving a few thousand dollars on it maybe. And then on top of that they, after going through like a week or two weeks of planning to figure this all out. So I think if, if you're going to Use it for a case like we're going to talk about here, the Masters or some other major event, whether it be the super bowl or the World cup or whatever. I think that's a great way to use it. And we have a case study in here that we'll talk about shortly that puts some numbers behind this, why it makes sense to actually do this. But from the business perspective, I feel like it's often just. It's overrated. And if you look at is the juice worth the squeeze? Oftentimes, I think people who are highly sophisticated and are running businesses or had major real estate portfolios, your time would be better spent doing something else and trying to figure out how to rent your. Your house to yourself. Unless you're actually going to do that. Like, unless you're actually going to do that. Sure.

[Nate]

But.

[Tom]

But I've seen too many people waste too much time for such a little benefit when they're using this from a business perspective.

[Nate]

100%, Tom, you could not fit that more and more properly. It's like, it's like people really sweat trying to do. It's like, oh, I want to have like my corporate board meetings here, right? And like, like. And look, if you're legitimately doing that, you have a good space for it, and like, it makes sense for your business partners to come over and do that. Fine. Right. If it. You're actually doing it and you're actually doing those things, awesome. If you're not documenting it, if you're just trying to make it up, this is like something that we see often come up in Taxport where someone way over abuses the strategy and like, oh, they rented out to their $100,000, right? And then like, the court goes, hey, if you look down the street, the hotel with a bigger space, nicer amenities was renting for like less than like 90% of that price, just FYI. And they go, oh, right. And so like, people try and do this. Like, look, I've only seen it literally one time. I've seen someone who lived in Beverly Hills who is like, oh, yeah, this is my hotel rate is like ten grand to rent out the conference room for a day. Like, okay, that's different. I think I'm still like over inflating in that, but still, like, that's a. That's where that situation makes sense. Maybe, but for everybody from 99% of the population, it doesn't really make a lot of sense.

[Tom]

Completely agree. Completely agree.

[Nate]

So I want to talk today about, like, how can people actually think about implementing it this year. And why am I saying that is because actually this is going to be one of the biggest like next two years and be some of the biggest sporting events that the US has ever seen. And the one that's coming up right now is the World Cup. Tom.

[Tom]

Yeah, the World cup you know, Nate were talking about before we hopped on. They're coming to multiple cities, I think L. A. Miami, few others. And there might be. What cities are they again? All the city.

[Nate]

Yeah, so. So Kansas City's one, Houston's another, New Jersey. They're coming all across like, like they're literally coming all across the US and so look, World Cups every four years and it's not very often it lands up in the same country over and over again. Right? So like. Okay, actually I got the full list here. So Atlanta, Boston, Dallas, Houston, Kansas City, Los Angeles, Miami, New York, New Jersey, Philadelphia, San Francisco, Seattle. Well, we got some Canadians too, Toronto and Vancouver, but still it is all over the place. And so normally. Right, so. So we got a case study here. We'll come back to it for the Augusta folk. But you can actually apply this, this case study will do for yourselves if you think, if you want to like capitalize on this. Right. And I'd recommend moving now because people are looking for places to stay now in June and July when this happens.

[Tom]

Yeah, no, for sure. And I know in Miami they just opened up a new stadium right near the airport, very conveniently for everybody who needs to travel. But unfortunately for the people in Miami, I don't know how well you're gonna be able to take advantage of this because the first thing is they also put a residential development right in the same location. If I'm not mistaken. I actually went to one of the real estate events where the developers were there and they gave a whole speech on this. And then secondly, many of the condo associations here in Miami, in the downtown and Brickell area, which is located close to where the stadium is, they put restrictions on your ability to do short term rentals. In fact, I think there's only two buildings in the area that are zoned for short term rentals. So most of you have to have a 30 day lease or more. So yeah, I don't know how well it's gonna be done for people in Miami. You have to do your own research. But it's just some context that I have just from happening to be.

[Nate]

We've probably caveat that Tom, that always double check where you're like your city rules and regulations. You know, I will say it's a short time. So who knows? What, why like, like if, like who knows, right? Like like what all this could happen. I know Kansas City, for example, is really strict. However, I also know that someone who's gonna do a third like this, so massive role in platinum, but doing a 30 day rental for like over like $50,000, Tom, it's going to be, it's crazy. Yeah, it's crazy that people are like, like, so you got people who wanted, who will are wanting to pay insane prices for these types of events. And so it's like, okay, how can you take advantage of it? So let's go through our case study and then we'll come back to the upcoming events. Right, Tom?

[Tom]

Yeah. Hey, real quick, if you've been a longtime listen to the show, then you know we give everything away for free from how to use the real estate professional status and the short term rental loophole to save tens of thousands of dollars on taxes and to upcoming tax changes. We don't hold anything back. And the only way we would help more real estate investors is if you rate, review and share the show. It just takes 15 seconds to leave a quick rating review or share with a friend who may find this information useful on their real estate journey. That's all for now. We'll dive right back into today's episode.

[Nate]

Okay, so Augusta Home. So basically so like look, we all just went to the Masters, you all saw all the beautiful areas and actually like if you get it into your, your algorithm, like on Instagram, for example, like people talk about like all these beautiful mansions. People can go rent out for these prices during that time frame, right? And so Augusta homeowners right now are pulling 10 to $25,000 for one week, completely tax free. Right? That's pretty sweet, Tom. Normally we always have to factor in the cost of taxes whenever we do any kind of transaction. This literally has no issue with that, right? Which is amazing. And so you got to like figure out, hey, since there is a massive demand in your market, your normal pricing is far, far higher than what it normally is, right? And so that's something to consider is the fact that, hey, like you don't have to charge nor nightly rates at this point because look at what the hotels are charging, right? Hotels could be charging ten grand a night in Kansas City or Houston for these types of events. So that's just something that's really crazy to think about and consider. How close are you to the event? That's the other thing too. Are you driving distance? Are you uber distance? Is that something you got to factor in? Are you walking distance? If you're walking distance, man, you've got a home run, honestly, when it comes to that type of stuff. So if you're thinking about doing that, maybe you're thinking about acquiring a property right now, right, Tom? Maybe it's the first year. Thinking about acquiring a property and maybe just like close now and take advantage of this massive rental opportunity. What are your thoughts overall on this piece, Tom?

[Tom]

Yeah, I mean, I think it's a very lucrative opportunity and I would say that you could use this. Even if you can't qualify for the master's exemption, you should still consider this. Like, for example, if you could buy somewhere, an investment property near one of these locations, then you might be putting yourself in a good position. If every year they come around, you could charge exorbitant amounts of rent. You know, demand driven, of course, market driven for this period of time. I know that where I used to live in Long island, there's the Bethpage Golf Course and sometimes they would have events coming over there. And I've had people who lived in that area stay that they had people offer, you know, absorbing amounts, 40k to clear out their entire house for the weekend and take it and then just go on a vacation, you know, whatever the case may be. So definitely, I think this is definitely an opportunity to take a look at and to see if you can take advantage of it.

[Nate]

Yeah, definitely, Tom. So let's just. So I'm just going to run through some of the events that are coming up right, over the next two years, per se. Right. FIFA, that's our biggest one this year. Right. That is a massive opportunity. Right. That only comes around every four years and not very often actually winds up coming to the United States either. Right. So just something. It won't come back, right? It will come back. How many years, though? Might be 10, 20, who knows then in 2028, Tom, we've got the Olympics in LA, actually a portion of a tiny, tiny portion, but a portion is also going to be in my home city, Oklahoma City, too. That's another opportunity. Right. The potential you could do. Right. It's two years out, so you got planning you can do with that. But let's say you live in one of those two areas. They're close by to where the events are being held. Yeah, it's something to think about and consider. It's like, hey, maybe you just vacate for a week or two, let someone stay there and take advantage, enjoy seeing the Olympics or something like that. Right. So that's one for sure. Super Bowls. Right. This is always an opportunity, like, it's always a massive event. People are always traveling, like in mass for that. So another really good opportunity, potentially, you can combat with the hotels. What are some of the other events, Tom, that you think people can take advantage of?

[Tom]

So we got some other ones coming up here. We got College Football Playoff expansions. So more games, more cities. We have the MLB All Star Games, NBA Finals, March Madness. There's a 2031 Rider cup for future PGA rotations. So obviously this applies for more than just the Augusta.

[Nate]

Right.

[Tom]

Area. But one thing I would say for some of these, it's a little bit harder to plan for because it's not routine. Right. Thing that why this is the master's role is because the master's always in Augusta, Georgia. Right. Or at least historically. So you know that every single year that you're going to be hit with this, you know, with the super bowl, for example, it's every year a different city. So unless you're really good at betting on who's going to. I mean, sorry, I don't know when

[Nate]

they, they released them pretty early. Yeah, they released them relatively early. So you can plan for that going forward. Like, you know, like I know where March Madness is going to be in 24 years. So that's something that you can potentially plan for and see and go, great, maybe you live in that city, right. I think it actually goes back to Indianapolis, something like that. But let's say, oh, great, I live in Indianapolis. And so maybe you can go ahead and plan for it again. You saw it happen this year. You didn't get a chance to take a piece of that and rent your property out for the March Madness tournament or the Final Four. So maybe you, maybe you just plan for it for next year. Maybe you find a way to get another. Like you want to expand the house a little bit, create a little ADU that maybe is an office for yourself. But then you say, hey, great, that year I'm going to rent it out to someone. Have not have them stay there, be really nice. There's a lot of things you can do there, right, Tom?

[Tom]

Yeah, yeah, there's a lot of opportunity there. I would say, like, if you want to take advantage of it from an investment point, might be best to invest in like Augusta because, you know that's, you know that's going to be there every year. Whereas these other things are a little bit more. They rotate. So they might always be in your city.

[Nate]

Sure. And Tom, like I think the other thing too is like, sure, maybe it's not an event, but maybe you live in a location, destination, Maybe you're listening right now. You live at the beach, right? And maybe you've never done this before. Take two weeks, let someone rent your property out from you, right? While you like maybe in like leave when you're on vacation, go somewhere else for two weeks, let someone rent it out in peak season, right? In the, in the summer or something like that, right? You all know that's like, that's the hottest time to go to the beach anyways, but that's when everybody wants to go. So say, hey, great, I'm going to choose July 4th weekend leave, let someone rent it out for an enormous amounts of rates depending on the property it is. And great, you could take that all tax free, right? But that's the key because it's a lot of pitfalls and common mistakes that people run into. Tom, what speaking of 14 days, what is one of those really big ones?

[Tom]

Really big ones. The 14 days is going over 14 days, right? People, you know you have to plan for this, right? Again, if you rent it out for 14 days or less, you do not have to report on your tax return. Of course, you don't report the income, you don't report the expenses. It's almost as if it never happened, right? Which is good. So if you made 50k for a week because you invested, you know, rented out for a week during a hot event or whatever the case may be, then great, you just pocketed 50k. I'm just using that as an example into your pocket, tax free. However, if it's 15 days, you know, now all of a sudden that becomes taxable, so you want to make sure you keep it under 14 days. And again, I don't want to sound like a broken record on this episode, but it has to be a residence, okay? If this is not a residence, meaning you're not living in it for more than 14 days over the year, then it is, then the union will not qualify for this exemption, right?

[Nate]

And I think people get, they get confused, Tom. Right? Because they think about their short term rental that they operate, that is on a beach or something like that. But it's a vacation property that they like to go stay at, right? It's like, and so like people get confused and go, wait, so doesn't that still apply to me? And the answer is yes, it does. But since you probably have a good number of rental days, but then if you stay there for over 14 days yourself. That means you've now stuck yourself in the vacation rental rules, right? And so that basically means now your deductions are heavily, you can own. Like this is the very bad part. We want to, we do not want to be in this. When we're doing cost segregation studies, we're looking for massive improvements. And the reason why is because you're actually going to lose deductions by doing that because you can only deduct losses up to income, right? So if you have $75,000 of income, but with depreciation and other things, other items, you've now taken yourself to $125,000. That would be like a $50,000 tax loss with depreciation. That's fantastic. Everybody wants to do that. But if you get to that 15th day of personal years, right, that means no working, nothing, anything like that, that 15th day of personal years, now you've totally like, I don't say ruined your strategy, but you definitely limited yourself. You have any thoughts on that, Tom?

[Tom]

Yeah, yeah. I think the best way to put this is if you're using a short term rental strategy, you're not going to be able to take the master's exemption. That's the best way to put it. Both these two things cannot exist. So you have to realize what strategy you're playing on. Again, the best way I could give an example for the master's rule is very simple. You have your home, you're living in a house or maybe it's a vacation rental that you just live in most of the year or part of the year and then you just rent it out for 14 days or less to somebody else. That's when this rule applies. If you have a short term rental, again, you're not this a short term rental, a pure investment, short term rental, short term rental loophole. That's not going to work for the strategy, right. You still make the money on a, on a hot day, you know, when it comes, you still make the investment play. You still won't get the tax benefits from that 100%.

[Nate]

Right? Yeah, you're totally, totally agree that it's like, yeah, it's a good framework is that look, if it's your personal residence, you want to rent it for less than 14 days and then you get all the amazing benefits. If you are going to be on the other side and it's a rental property, you want to make sure that you're personally under 14 days. Honestly, ideally zero if we're doing cost, irrigation, study or anything like that. Right. That's actually the ideal situation now. Personal use comes into play or working days. Right. That's super important that we have to think about too think about that type of stuff. But look, I think it's just an interesting opportunity that we don't normally get to see when the US has all these types of big events that are coming up. So just FYI, we wanted to toss that out there for you guys and just kind of like go like, hey, Masters is fun. Everyone enjoys the event. It's worth doing a recap. I know it's coming out a week after the Masters technically has been finished up. Congrats to McElroy for basically being twice a winner. Right, Tom? That's kind of nuts, actually. Like the fact that he's the fourth person on that list now to have won it twice, which is pretty crazy.

[Tom]

Yeah, McElroy, he's the masters guy. I haven't really been paying too much attention from it. The only time I think of the Masters, I just think of Tiger Woods. But we all know what Tiger woods is facing, his own trials and tribulations at this point. So.

[Nate]

Yeah, yeah, he unfortunately is. Yeah. That is not. Anyways, so just to recap, 280 cap a G is the Masters exception. Tax code. Just wanted to give you guys a little heads up there. And so we have been talking for weeks that we want to help answer you guys questions. And so we actually have one question we kind of want to go over today and we will turn this into a podcast, but I think it's. At least we can do like a quick two minutes on this one. Tom. So someone asked, what's an effective way to get a rental property out of an S Corp? And I'll give my opinion. I want Tom to give his. My opinion is don't put it in the S Corp in the first place. But I want Tom to go now.

[Tom]

Yeah, yeah, I mean, I agree with that. You know, start with the end in mind. Just don't put it into the S Corp to begin with and you're. You're in good shape. However, from my experience being a tax advisor, I've seen in many, many, many cases at this point, the property's already in the S Corporation. And now what do we do? There's been a situation, I always tell the story where we had a client who put a property in S Corporation back in the 90s. And now fast forward to 2020, whatever the year was, and it had highly appreciated, significantly, and the bank would not refinance it unless it was in its own LLC independent of all the other activities within that S Corporation. And the problem is they would have to effectively remove it from the S Corporation, which triggers a sale. And when you trigger sale, that comes with capital gains. And in this case it's a phantom gain because you're not really selling it to a third party and collecting the cash, you're simply maneuvering it in and out of or you're trying to take it out of the S Corporation. And that's where the problem comes down to. And the big question always is, what is the most effective way or the most tax advantaged way to get this out of the S Corporation? Right.

[Nate]

Honestly, I think there's two frameworks to think about it. There's only two frameworks and it's either a, you bite the bullet today and pay the tax. And when I say what do you mean pay the tax? I'm just taking it out of the llc, which is an S corp. Well, that's a taxable distribution, right? Unfortunately, it's a taxable distribution. And it's also since you're probably returning it to yourself, actually what that means too is since you're doing that, you're now pulling it back is that it's actually there's what we call 1239 issue, which is a tax code section. It says whenever you distribute anything that's depreciable to a related party that is yourself, because you own the corporation probably 100% yourself at that point in time. That means it's now ordinary income too. So it's not just capital gains income. So you're not just going to get. So you're getting taxed on it, normally capital gains, but in this case ordinary income. So look, you got to bite the bullet, right? You have to bite the bullet. However you get a step up in basis might be worth doing a cost segregation on, no bonus depreciation, but might be worth doing a cost segregation on. Now you can take advantage of the losses outside of the S Corp. There's other issues with that that Tom and I will discuss in another podcast. Right, we'll go over that probably on the next one, but we'll talk about that. And so you can do that or you just gotta wait till you drop. What does that mean? Till you die. So it's like, I know, look, I know it sounds morbid and I'm not recommending that as a strategy to do that piece. And that's not the strategy I'm recommending. What I am recommending is just tell you, hey, you create a plan between you and your family and your whoever is going to inherit this property, you create a plan with them and so that when they get it, because they, they now have to go into honestly really fast mode and start selling all these properties. Because in the year you liquidate the S corp and sell all the properties is when you have to do it all at the same time to make it work properly.

[Tom]

Yeah, there's a few ways to do it. There's a few options here. S corp liquidation is one of them. And you know, you'd have to sell all your properties and liquidate the S corp. I've explored things like the F reorganizations and things like that. I'm sure we'll get into those type of details on our next show. But unfortunately the long story short of the answer for everybody who's is wondering is there. I think one of the questions we were post is there a way out? I've heard they've heard that there was, there was no way out of this. There's no good way out of it. Let's put it that way. Oftentimes unless you get lucky that your circumstances you have a major non passive loss in the same year. But even that's not ideal because you probably don't want to use those losses to liquidate the S corporation typically or to get the property out. So yeah, I mean, I think we're going to have to unpack this in much greater detail on the next episode. So anybody who wants to tune in to really hear the nitty gritty on this, do stay tuned for that next episode. But long story short, you know the best thing to do going back to what Nate said is don't put properties in an S corporation to begin with. And if you've been putting properties in an S corporation, stop. Stop right now.

[Nate]

Yeah, okay.

[Tom]

Save yourself the future damage. A lot of attorneys historically have put properties in S corporation due to the asset protection that is purportedly gotten from putting properties in S corporation. But they failed to take into account the potential tax ramifications which sometimes attorneys often do when doing some entity structures. So bottom line is don't put them in there to begin with and if you are currently putting them there, stop doing it.

[Nate]

Yep. Yeah, I couldn't have a better time. I'm looking at someone's like, well that doesn't help me now. I'm like, unfortunately we have insanely limited options when it comes to that. Right. That's not just us saying, it's like, hey, you just can't do anything that's Saying, hey, the tax code says you can't do anything unfortunately. So can you get creative? That's where it's like worth having conversation with one of our. Someone on our team just like say, hey, what can I do? And they can explore options with you and build your overall strategy there. Right? That's where like you need someone. Honestly, if you've got an S Corp and get rental properties, it's definitely worth having an advisor at that point in time, I feel like. But yeah, so just FYI on that. Any final thoughts, Tom? We have like a few more announcements. Any final thoughts there?

[Tom]

No, not on the S Corp stuff. You guys are just gonna have to tune in because there's a lot more details that go on. We just gave a very good like synopsis of the bottom line for you. Right. Yeah, we'll have to take it to the next episode.

[Nate]

Yep. Another quick announcement. We are currently hiring for a senior tax advisor at hall cpa. So if you'd like to join our team. You're listening to the podcast now, right? You're someone that's a, you're a CPA and a real estate investor or just CPA trying to learn more about taxes and real estate. Right? We know you're out there. Hey, go to LinkedIn, take a look at our profile. We'd love to have a conversation with you. We might even drop the posting in the comments too. So just get with us. Would love to have a conversation with you, Tom. Any final thoughts before we wrap up today?

[Tom]

Yeah, no, no, no. I just, just double down on what you said about the senior tax advisor. Like if you guys are out there and you're. This is right after busy season, right? And you, you want to get out of the compliance grind, but you want to put some of the skills you built up in, in partnership tax or real estate taxation to work as an advisor, as a consultant to people, it actually help them use the tax code to their advantage. This is a great opportunity for you to make that pivot. So if you're a senior accountant, you're a tax manager at a firm and you want to go in the more the consulting direction and get out of just strictly compliance, this could be a great opportunity for you. So again, check out the link into the show notes of this episode for more information on that role. Last thing I will say is that if you are a real estate investor or investment company tuning in and you are looking for CPA to help you navigate the world of tax or you're looking to outsource your account and get that off your plate so you can focus on growing your business or spending more time with family doing the things that are more meaningful things in your life. Then we'd invite you to fill out the form in the Show Notes to request a consultation with the team. We'd love to learn more about your situation and how we can help. And of course like Comment and Subscribe all right, that's it for today's episode of Tax Model RAI Podcast. We'll catch you guys next week. And Happy investing the Taxpayer Real Estate Investors Podcast is for general information purposes only and is not intended to provide and should not be relied upon for tax, legal or accounting advice. Information on the podcast may not constitute the most up to date legal or other information. No reader, user or listener of this podcast should act or refrain from acting on the basis of the information on this podcast without first seeking legal and tax advice from counsel in the relevant jurisdiction. Use of an access to this podcast or any of the links or resources contained or mentioned within the Podcast show or Show Notes do not create a relationship between the reader, user or or listener of the podcast and the host, contributors or guests. Any mention of third party vendors, products or services does not constitute an endorsement or recommendation. You should conduct your own due diligence before engaging any vendor. For more information, reference the show notes or description of this episode.

[Podcast Host]

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