The Masters Exemption: Renting Your Home Tax-Free
One of the nicest things about owning a vacation or second home is being able to jump in the car and go there, whenever you want, knowing everything will be just as you left it, ready for you to escape for a weekend, a week, or as long as you have.
Maybe you and your partner split your time between two cities. One of you works in New York, the other in San Diego, and you meet in one place or the other on weekends and holidays.
Wouldn’t it be nice to make a little extra income to recoup some of your travel costs? And wouldn’t it be even nicer to not have to pay taxes on that income?
The “Masters Exemption,” named after the famous golf tournament in Augusta, Georgia, allows homeowners to rent out their home for 14 days or less per year, without reporting the income. In Augusta, that can mean as much as $20,000 tax-free for homeowners who are willing to move out during the tournament. If your home is near a yearly political convention, a big athletic venue (If you live in San Francisco or Santa Clara,congratulations! If not, fingers crossed that the Super Bowl comes to a stadium near you!), or any yearly festival or event that draws large crowds who need places to stay, you might be in an ideal position.
Are San Francisco residents getting as much as they expected by renting their homes during the Super Bowl? Maybe not.
Or maybe you just live somewhere nice, near a lake or the ocean, or close to good skiing, and you like to take a vacation yourself. Why not rent out your place while you’re gone? You won’t have to pay a housesitter, and you’ll make some cash to offset your own vacation cost.
And if you’re splitting your time between two homes, or count one of your homes as a vacation or second home, you can take the exemption more than once in a year, just not on the same place. So, you could rent out your apartment in Chicago during the Jazz Festival, and your place in Miami during Art Basel or over spring break. (On second thought, maybe not during spring break. After all, you have to come back and live there.) Your flat in New York may be in high demand during fashion week, when you’ll head to your place in Austin, which you’ll rent out during South by Southwest, to some cool tech people who may even leave you a half bottle of small batch bourbon that they forgot to drink.
There are a few things to think about before taking the Masters Exemption.
- How will you vet renters? You may ask to run a credit check, speak to their current landlord, or get other references.
- Are you renting to a corporation or through a corporation like AirBnB? Keep good records, because they may need to send you a 1099, stating how much you were paid. The IRS then has that payment on record, so you’ll need to show your place was only rented for those days to avoid being penalized for not reporting the income.
- How will you handle it if the renters cause damage to your home? You may want to consider asking for a security deposit as, unlike a regular landlord, you won’t be able to deduct maintenance expenses or depreciation on your taxes. (This is another good reason not to rent to spring break revelers.)
While renting your place out for a few days likely won’t be an enormous source of income, who couldn’t use a little extra? And you may even want to get out of town when your neighborhood is taken over by festival goers!
Read more →
What Do You Do If Your Tenants Trashed Your House?