Paying yourself

The Augusta Rule, and the part everybody leaves out

Somebody on social media told you to rent your house to your business for fourteen days and take the money tax free. The rule is real. The version in the video is not.

This one arrives in my office more than any other idea from the internet. It has a good name, a clean story, and a number attached. It is also the strategy I most often have to unwind after the fact.

Let me be clear at the start. The rule exists, it is in the code, and used properly it is legitimate. The problem is never the rule. The problem is that the videos stop halfway through it.

The misconception

The version people arrive with is that you write your business a rent invoice for fourteen days, the business deducts it, you exclude it, and everybody goes home happy. Free money, fourteen times a year, for owning a house you already own.

That version has no meetings in it, no market rate behind it, and no documents around it. Those three omissions are the entire difference between a defensible position and a deduction that disappears the moment anyone asks a question.

What is actually happening

There is a limited exclusion for renting a personal residence for a small number of days in a year. Rent it within that limit and the rental income is generally excluded from your personal income.

Separately, a business can deduct rent it pays for a genuine business use of space. Put the two together and the business gets a deduction while the individual excludes the income. That is the mechanism, and it only works because both halves stand on their own.

It is a real transaction or it is nothing at all. There is no middle version.

A real transaction means a meeting that would have happened somewhere, held at your home instead, at a price a stranger would have charged for comparable space, paid by the business to you, with paperwork on both sides.

The number

What this is worth depends entirely on two variables. The number of days you genuinely use, and the market rate you can defend for your space in your area. A modest home in a market with cheap meeting space supports a modest rate. A large home in an expensive market supports more.

Multiply a defensible daily rate by the days actually used, and apply your own marginal rate to the deduction. For most owners that lands somewhere between a pleasant annual amount and a genuinely useful one. It is generally not life changing, and anyone presenting it as the centrepiece of a tax plan is selling you the video version.

The day limit is a fixed small number and the rules around it can change. Treat the count as something to confirm for the year in question rather than something to assume.

What it actually requires

This is the half that gets cut from the video:

• Genuine business meetings with a real purpose, not a family dinner relabelled
• A market rate supported by written quotes from comparable local venues, gathered at the time
• An invoice from you to the business for each rental day
• An actual payment from the business account to your personal account
• Minutes or an agenda for each meeting, showing who attended and what was decided
• A day count you can produce on request, kept as the year goes

None of that is difficult. All of it is boring, and boring is exactly what makes a position hold. The file either exists or it does not, and it cannot be created later in any way that looks like it was created at the time.

Who this is not for

If you are not going to hold real meetings, this is not for you. Not as a smaller version, not as a careful version. A rental with no business activity behind it is a payment to yourself with a label on it, and the label does not survive contact with a question.

It is also not for you if your home would not command a meaningful rate. If comparable space in your area rents for very little, the whole exercise generates a small deduction and a large amount of record keeping. You will stop doing the records by year two and keep taking the deduction, which is the worst of both outcomes.

And it is not for the owner who wants to run it at an aggressive daily rate because a spreadsheet online suggested one. An unsupported rate is the fastest way to turn a legitimate position into an expensive one.

The timing

Documented as it happens. Every part of this is contemporaneous by nature. A December afternoon spent inventing fourteen meetings for the year that just passed produces a file that reads exactly like what it is.

This is a planning question

Your preparer cannot create this in the spring. By then either the meetings happened and the file exists, or they did not. Deciding whether this fits your business, setting a rate you can stand behind, and building the habit of documenting it all belongs to planning, before the year runs.

This is general information, not advice on your own situation. Whether any of it applies to you depends on facts this article does not know.