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Tax-Free Rental of Your Home
By Jason Watson, CPA
Posted Tuesday, October 12, 2021
This is the so-called Masters Rule which stems from Internal Revenue Code Section 280A(g). It is a unique rule in which homeowners who rent out their property for 14 days or fewer in a tax year are not considered to be engaged in the activity for profit, and therefore do not have to claim the rental income.
Therefore, you find a business connection for renting space in your home for 14 days or fewer. Client parties and presentations are good examples. Board meetings for closely held businesses is a bad example (or at least one that is tough to defend). Your business enters into a lease arrangement at market rates. The business deducts the amounts paid as rent and issues a 1099 to you. On your individual tax return (Form 1040), the amount of rent is reduced to zero with a one-time expense under Section 280A in the amount of rent.
WCG has a client who sells Pampered Chef, and she hosts demonstrations and parties once a month for a $1,000 per event. Her S Corp deducts $12,000 in rental expense but the cash received is considered tax-free. She legitimized this with competitive rate offers from banquet halls and the like, plus a contract between her and her S Corp. Perfect!
Additionally, your property’s mortgage interest and property taxes are still deductible. Yeah baby! They call it the Masters Rule allegedly from those who rent out their homes for the Masters Tournament in Augusta, Georgia.
Taxpayer's Comprehensive Guide to LLCs and S Corps 2021-2022 Edition
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