Augusta Rule for Physicians: Turn Your Home into a Tax-Free Asset

One of the most powerful tools in our kit for practice owners is IRC § 280A(g), also known as the "Augusta Rule." When executed correctly, this allows you to rent your personal residence to your medical practice. Your business gets a tax deduction, and you receive the income entirely tax-free. It sounds like a loophole, but it's black-letter law that's been on the books since 1976.

What is the Augusta Rule?

The Augusta Rule gets its nickname from the Masters Golf Tournament in Augusta, Georgia.

Back in the 1970s, residents of Augusta lobbied Congress. They wanted to rent their homes to golfers and spectators during the tournament without dealing with the hassle of dealing with taxes on that rental income. For one week a year, their quiet residential streets turned into prime real estate, and they wanted to capitalize on it without creating a tax headache.

Congress agreed, and IRC § 280A(g) was born.

Here's the basic translation of the law: If you rent out your personal residence for 14 days or fewer during the tax year, that income is excluded from your taxable income.

For the average homeowner, this is a nice perk if they rent their house out on Airbnb for a big weekend event or during a local festival. For a physician business owner, this is a massive tax planning opportunity that can save you $5,000 to $15,000+ annually depending on your rental rate and tax bracket.

The "Double-Dip" Advantage

Here's where it gets interesting for practice owners. Because you own your medical practice (likely structured as an S-Corp), you're on both sides of the transaction:

Side A (The Business):

Your practice rents your home for a legitimate business meeting. The practice pays rent to you. This is a fully deductible business expense under IRC § 162, lowering your business's taxable income.

Side B (The Individual):

You, the homeowner, receive the rent. Because it's for 14 days or fewer, this income is completely excluded from your personal gross income under IRC § 280A(g).

Where Execution Matters Most

Physicians are often targets for aggressive tax schemes that promise the moon but deliver an audit. We've seen physicians attend seminars where promoters claim you can rent your home to your practice for $5,000 a day for a "board meeting" that consisted of eating pizza, watching a football game, and calling it "team building."

However, the IRS is not blind.

Because you control the business paying the rent and you own the house receiving the rent, the IRS scrutinizes these transactions under the economic substance doctrine. This means the transaction must have a legitimate business purpose beyond just saving taxes.

The IRS wants to see:

• Fair market value pricing: What would an unrelated third party pay for similar space?

• Legitimate business purpose: Was this actually a necessary business meeting? Did business occur at this meeting?

• Proper documentation: Can you prove it happened and why it mattered?

If any of these elements are missing, the deduction can be disallowed entirely and you may face penalties for negligence or substantial understatement of income tax.

The Cautionary Tales: Real Cases, Real Consequences

There are two recent Tax Court cases that every physician should know about before attempting this strategy.

Case 1: Sinopoli v. Commissioner (T.C. Memo. 2018-61)

The Setup: A medical practice claimed substantial deductions for renting the taxpayers' homes for business meetings. They claimed a rental rate of approximately $3,000 per meeting, far higher than any local comparable.

The Problem: They had no credible evidence that their homes were worth $3,000 a day as a meeting space. No appraisal, no comparable rental quotes, no justification. The IRS challenged the fair market value, and the taxpayers couldn't substantiate their rates.

The Result: The Tax Court sided with the IRS. The allowable deduction was slashed to $500 per meeting, a rate based on local hotel meeting room comparables. The taxpayers lost roughly 83% of the deduction they claimed and likely paid penalties on top of it.

Case 2: Jadav v. Commissioner (T.C. Memo. 2020-141)

The Setup: The taxpayer paid a hefty fee for a "tax plan" that included aggressive use of the Augusta Rule. The plan promised significant savings with minimal effort.

The Problem: They didn't do the work. They used estimated rental rates rather than actual comparables, failed to document the business purpose adequately, and couldn't produce meeting minutes or agendas. When the IRS audited them, they had nothing to show.

The Result: The deduction was wiped out entirely. The court found the expenses were not properly substantiated under IRC § 274(d) and § 162. The taxpayer not only lost the deduction but also paid accuracy-related penalties under IRC § 6662.

These cases illustrate a critical principle: being overly aggressive without documentation is a direct path to an audit loss. Your tax team is here to ensure you stay compliant, safe, and audit-proof.

Step-by-Step Implementation Guide

The IRS requires a complete "paper trail" that proves this was a legitimate business transaction conducted at arm's length. If it's not documented, it didn't happen and you'll lose the deduction in an audit.

Follow this checklist to ensure your Augusta Rule planning is audit-proof.

1. Verify Your Business Structure

This strategy works best for:

• S-Corporations

• C-Corporations

• Partnerships (where the practice is a separate legal entity). Please note there are some added risks/complexities with partnerships and so, generally speaking, a corporation (C or S) is the ideal entity for this strategy.

Note for Sole Proprietors: If you're a Schedule C filer (sole proprietorship), this strategy is generally not recommended. You can't technically rent to yourself under IRC § 280A(g) because there's no separate business entity. Contact your tax team to discuss whether restructuring to an S-Corp makes sense for you.

2. Determine Fair Market Value (FMV)

You must prove that the rent you're charging is reasonable and comparable to what an unrelated third party would pay.

Do This:

• Call 3-5 local hotels, event centers, or co-working spaces

• Ask for a quote for a meeting room of similar size and amenities for a full day (8 hours)

• Specify: number of attendees, need for Wi-Fi, AV equipment, catering space

Print It: Save these quotes (email confirmations, PDF brochures, screenshots) to your tax file. This is your "comp" evidence.

Be Reasonable: If a generic hotel conference room is $500/day, don't charge $5,000/day. The IRS expects market rates, not inflated rates designed to maximize your deduction.

3. Create a Formal Rental Agreement

Treat this like an arm's-length transaction between unrelated parties. Draft a simple lease agreement between you (the landlord) and your practice (the tenant).

Include:

• Rental rate (per day or per meeting)

• Payment terms (due within 30 days of invoice)

• Amenities included (Wi-Fi, AV equipment, kitchen access, parking)

• Dates of rental (specify the 14-day maximum)

• Signatures from both parties (you as landlord, you as practice owner/officer)

Template Tip: Your tax team can provide you with a compliant rental agreement template.

4. Document the Meetings (This is Crucial!)

You must prove the meeting actually happened and was conducted for legitimate business purposes.

For every rental day, produce meeting minutes that include:

• Date and time of the meeting (start and end time)

• Location (your home address)

• List of attendees (names and titles)

• Agenda topics (e.g., "Review Q2 P&L and variance analysis," "Discuss hiring of RN anesthetist," "HIPAA compliance training and policy updates," "2026 compensation structure for partners")

• Decisions made or action items (e.g., "Motion to hire Sarah Johnson as practice administrator: passed unanimously")

• Signature of secretary or officer

Pro Tip: No minutes, no deduction. The IRS loves to deny deductions for "meetings" that can't be substantiated with an agenda and attendance record.

These don't need to be elaborate, but they must exist and must be contemporaneous (created at or near the time of the meeting).

5. Invoice and Pay Properly

Your business needs to physically pay you, and there must be a clear money trail.

Create an Invoice:

• From: [Your Name], Landlord

• To: [Your Practice Name], Tenant

• Date of service

• Description: "Rental of residence at [address] for business meeting on [date]"

• Amount due: $1,200 (or your rate)

Pay by Check or Electronic Transfer:

• Do not use cash since there's no audit trail

• The payment should clearly show "[Practice Name]" paid "[Your Name]"

• Pay invoices in the same tax year the deduction is taken

Timing Matters: If the meeting happened in December 2025, the invoice should be paid by December 31, 2025 (for cash basis taxpayers) or within a reasonable time for accrual-basis taxpayers.

6. The Form 1099 Reporting Nuance

This is a technical area where even tax professionals disagree, but here's what we recommend:

General Rule: Rental payments of $600 or more to an individual require the business to issue a Form 1099-MISC (Box 1: Rents) or Form 1099-NEC depending on the classification.

The Conflict: If you receive a Form 1099, the IRS computer system expects to see that income reported somewhere on your personal return, typically Schedule E (rental income). But under IRC § 280A(g), you don't report it because it's excluded from gross income.

The Fix: Your tax team will handle this reporting nuance carefully. We typically advise:

1. Issue the Form 1099 to establish the paper trail and prove the payment happened

2. Report the income on Schedule E as rental income, then subtract it as an exclusion with a notation: "IRC § 280A(g) exclusion – rental of residence for 14 days or fewer"

This prevents the IRS computer from sending you an automated "underreporting" notice while still claiming the exclusion properly.

Some practitioners skip the Form 1099 entirely if payments are under $600 per meeting, but this creates inconsistency if you're paying $15,000+ annually. We prefer full transparency with proper exclusion notation.

Conclusion: Keep What's Yours

The Augusta Rule is a legitimate, powerful way to extract equity from your business tax-free. It converts taxable business income into tax-free personal income, leveraging an asset you already own: your home.

But remember the physician nuance: Because you have the means to pay high rent and the incentive to lower high taxes, the IRS expects you to cross your t's and dot your i's. The more you earn, the more documentation matters.

Don't let fear of paperwork stop you from claiming thousands of dollars that belong in your pocket, not the Treasury's. But don't let aggressive promoters lead you into a sloppy audit situation either.

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Disclaimer: This material is intended for educational and informational purposes only and does not constitute tax, legal, accounting, or financial advice. The content is general in nature and may not apply to your specific circumstances. Tax laws and financial regulations are subject to change and interpretation, and the application of these laws can vary based on individual situations. Before making any decisions, you should consult with a qualified tax advisor, legal counsel, or financial professional.

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