The Augusta Rule and Paying Your Children: Two Tax Strategies That Work (If You Follow the Rules)
- Nate Meeker, CPA
- Jul 10
- 3 min read
Two of the most discussed tax strategies for business owners and real estate investors are the Augusta Rule and hiring your children. Both are completely legal, reasonably well-known, and routinely done wrong. When they're done right, the savings are genuine. When they're not, the deduction gets disallowed and the audit risk goes up.
The Augusta Rule: Renting Your Home to Your Business
The Augusta Rule, named after Augusta, Georgia and the Masters Tournament, comes from IRC § 280A(g). It allows homeowners to rent their personal residence to a business for up to 14 days per year without reporting that rental income on their personal return. The business, meanwhile, can deduct the rent it paid as an ordinary business expense.
The scenario it's designed for: you hold a company meeting, training, or event at your home. Your business pays you fair market rent for the space. You keep the income tax-free. The business gets the deduction. Done correctly, this strategy can generate $5,000 to $20,000 or more in deductions depending on your home's rental value and the number of qualifying events.
What the IRS Actually Requires
The rent has to be at fair market rate, meaning what a comparable venue would charge for similar space. Charging $10,000 per day for a spare bedroom strains credibility and invites scrutiny. The business purpose of each rental day needs to be documented: meeting agendas, attendees, the nature of the event. The landlord-tenant relationship also needs to be legitimate. The business should have a formal rental agreement with the homeowner, even if they're the same person in different roles.
The 14-day limit is absolute. Day 15 changes the tax treatment entirely, and the entire year's rental income becomes reportable.
Paying Your Children: The Strategy
If your child does legitimate work for your business, you can pay them a wage. That wage is deductible as a business expense and shifts income from your higher tax bracket to your child's lower one. For children under 18 employed by a sole proprietorship or partnership owned by parents, there's no FICA (Social Security and Medicare) on the wages, which creates additional savings.
A child earning under the standard deduction amount pays zero federal income tax on those wages. You've effectively moved money from a 32% or 37% tax bracket to a 0% bracket. The child can use the earnings for college savings, Roth IRA contributions, or day-to-day expenses, and the money stays in the family.
What Makes the IRS Look Twice
The work has to be real, the pay has to be reasonable, and the records need to back it up. Paying a 7-year-old $30,000 per year for "marketing services" is not a plan. It is a problem. Age-appropriate tasks, reasonable wages (what you'd pay an outside hire for the same work), and proper payroll records are all required. The child needs to actually receive and control their earnings. Running it through a payroll system instead of an informal cash payment is the difference between a legitimate deduction and an easy disallowance.
Combining Both Strategies
Used together with an S-Corp structure, an accountable plan, and real estate tax strategies, these tools can shift a meaningful amount of income away from your highest-tax dollars. The key word is combined. No single strategy produces dramatic results in isolation. The impact comes from layering multiple legitimate approaches in a coordinated plan.
Running a Business Alongside Your Real Estate Portfolio?
The best results usually come from coordinating multiple legitimate strategies around your business income, family, and real estate activities.
Let’s review the full picture and identify where the strongest tax-planning opportunities are.
