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In this episode, we explore the Augusta Rule, a unique tax strategy that allows homeowners to rent out their property for up to 14 days annually without paying taxes on the rental income. Our guest, Alexis E. Gallati, a tax strategist, will break down the fundamentals of the Augusta Rule, its benefits, and how homeowners can implement this strategy while complying with IRS regulations. Alexis will share insights on setting competitive rental rates, documenting compliance, and maximizing the potential of this tax exemption.

Alexis E. Gallati is a tax strategist.

She discusses the KevinMD article, “How doctors can use the Augusta Rule to save on taxes.”

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Transcript

Kevin Pho: Hi, and welcome to the show. Subscribe at KevinMD.com/podcast, and get CME for this episode by clicking on the CME link in the show notes. Today we welcome Alexis E. Gallati. She’s a tax strategist, and today’s KevinMD article is “How doctors can use the Augusta Rule to save on taxes.” Alexis, welcome to the show.

Alexis E. Gallati: Thank you so much, Kevin. It’s great to be here.

Kevin Pho: So let’s start by briefly sharing your story and journey.

Alexis E. Gallati: Yeah, definitely. So I grew up in a physician household. My dad was a private practice neurologist, and I married a private practice neurosurgeon. We actually met the second week of college, sorry, and went through that entire journey of medical school and residency, et cetera.

And while he was doing medical school and residency, I was just working for local regional CPA firms. And in 2014 I went out on my own with Cerebral Tax Advisors. And that was because I saw the writing on the wall. My husband was not getting any education at all for financial purposes, you know, running a business, et cetera, through medical school or residency. And I was like, oh, how are the Bill Gates and Warren Buffetts of the world getting that 15 percent to zero percent tax bracket?

So I really dedicated myself to learning those tax strategies, and just getting really, really intimate with the IRS and what they’re looking for. And so when I started creating Cerebral, it was just kind of natural, organic, that we were working with medical professionals. That was just kind of the crowd I went and rolled with, et cetera.

And so now, Cerebral, we’re 100 percent virtual, we have clients in 40 plus states, and we offer everything from proactive strategic tax planning, that’s really how we start working together, all the way to doing your tax preparation, your accounting, CFO services, IRS and state representation, et cetera. And I’m just really excited that I’m able to give very straightforward, honest advice. You know, Cerebral doesn’t take any commissions or kickbacks with any strategies we recommend. So a very big education, and making sure that physicians know their options and they’re not going to be, you know, try to be sold like that whole life insurance policy or stuff like that.

Kevin Pho: Sure, sure. So I know that this is a broad question, so in general, for the physician community, what would you say are some of the biggest tax mistakes that you see them making?

Alexis E. Gallati: Yeah, it sounds so generic to say this, but just not planning ahead. You know, y’all are just so in the moment, you’re so busy, it totally makes sense. But you have to start early when it comes to planning, and in the year that you actually want those deductions or credits to actually count.

But major things are, you know, not planning for retirement properly. Whether you’re just a W-2 and you’re not maxing out what’s available to you through your employer, or maybe you’re self-employed and you’re not putting enough away to just make sure that you’re building that wealth.

And with most physicians I’m also finding that, since they are so incredibly busy, they’re not taking advantage of as many different types of strategies that they can. Like hiring their kids, being able to help with their legacy wealth accumulation. Or if they have employees, not structuring things properly in terms of benefits. All these different types of strategies that clients just aren’t taking advantage of. Maybe buying their office building and being able to take advantage of that through real estate strategies, for example.

Kevin Pho: All right. So we’re going to talk about one particular tax strategy, the Augusta Rule. Your KevinMD article is titled “How doctors can use the Augusta Rule to save on taxes.” Now for those who didn’t get a chance to read your article, tell us what it’s about.

Alexis E. Gallati: Yeah. Well, the Augusta Rule seems to be the TikTok happening tax advice right now, and there’s so much misinformation that goes around it, that’s why I wanted to do an article on this topic.

And so with the Augusta Rule, if people aren’t familiar with it, it really is named after Augusta, Georgia, which has the Masters golf tournament. And there are people down there that will rent their home out to those that come for the Masters for this event. And as long as the rental period is 14 days or less, then you don’t have to pay tax on the income that you earn.

And so it’s a really powerful strategy. Like, I have clients that actually do this in Augusta, Georgia. I also have some that do this in Colorado, they have a home that they have near the ski slopes. And so it’s amazing, because as long as they stay 14 days or less on that property, then renting it out, then they don’t have to pay a lick of tax on that $30,000, $40,000 that they’re getting for those two weeks.

But what’s interesting is that you’re able to use this for your own business as well. So you can rent your home to your business, again for 14 days or less, and those days don’t have to be consecutive. And that allows your business to not only get a tax deduction for that rent, but you’re also not having to pay tax as the individual on that income.

And where I find a lot of people struggle with it is just knowing, OK, what are the rules, what do I have to follow, and also making sure that they have proper agreements in place, that they have a proper rental rate determined as well. And basically that article will help kind of clear up some of that mystery, and then they’ll be able to do this themselves.

Kevin Pho: So give us some case studies or scenarios where a physician would use the Augusta Rule. And you alluded to this earlier about how a physician can rent a part of their house to their business and have some tax advantages there. So go into more detail. What would be some scenarios where a physician, or one of your physician clients, can use the Augusta Rule to advantage?

Alexis E. Gallati: Yeah, so a lot of my clients will use it for monthly board meetings. And so if you do a board meeting and that’s one day a month, there’s 12 days right there. You can also do emergency board meetings to make up those extra two days. Or you can do employee parties. If you have a hospital representative or a vendor that you want to entertain, then you can rent your home to your business for that evening or that day, in order to go and cater to those potential new patients or vendors, et cetera.

You just want to make sure that, like I mentioned before, you have a proper rental agreement in place, and that you document each of these events, like using meeting minutes for example, if you’re doing the monthly board meeting. And these minutes don’t have to be novels. It just has to say, you know, who was there, the date, what was discussed.

And sometimes, if you’re doing it as a monthly board meeting, you could just be discussing like, hey, this is what happened in the business that month, I had to hire somebody, I had to fire somebody, talking about your financials, what marketing are we going to do. Just any of those business decisions can help to substantiate the reason for that meeting.

Kevin Pho: And in terms of the rate one would charge to do that, what would be some reasonable rate that you see? Because in theory, couldn’t you charge anything?

Alexis E. Gallati: You could, but you always got to remember that the IRS needs it to be considered ordinary and necessary for it to be a business deduction, and it has to be reasonable.

So what a lot of people will do, there’s some different methods. Probably the most popular method is looking on Airbnb or VRBO to see how much is an equivalent home renting in your area. So you would go and try to find two or three of those comps, and then you’re able to take, what I like to do is take an average price per square foot, and then that way I can apply that average price per square foot between those two to three comps to the square footage that I’m using for my home.

And I’m a little bit more conservative when it comes to using the square footage. I’m not necessarily going to use my full home square footage, and that’s because if you end up using the home office deduction, I don’t want to, for example, count the square footage of my home office. As I mentioned before, this strategy has been around for a long time, but it’s just become a lot more popular, and there’s not a ton of case studies or court cases around it. And so I want to make sure that the IRS doesn’t look at, like, hey, you’re taking your home office already, why are you using that square footage again? I want to eliminate that possible road bump with the IRS. So take out that square footage.

I also like to, like with my home for example, I don’t include the square footage of my second floor, because that’s where my kids’ rooms are and the playroom. You know, I can see the IRS being a little bit more scrutinizing of, oh, you didn’t use the whole square footage. And there will be people out there like, well, if you were to rent out that Airbnb you’re renting the full square footage whether you use it all or not. True, true. But like I said, I’m wanting to be a little bit more conservative and not poke the bear too much.

Kevin Pho: What are some common misconceptions or mistakes that you see some of your clients using the Augusta Rule fall into? What would be some traps?

Alexis E. Gallati: Not having proper documentation, definitely. I mean, 90 percent of a case with the IRS is that documentation and that business intent. And so even, it might feel silly to write down what your business intent is each time, but having that down the road, especially because IRS has three years to audit you, you’re not going to remember what happened three years ago. So to have that documented, the business intent, having a proper rental agreement between you and your business, is really important. As well as documenting how you came up with that reasonable rental rate. I mean, print out the Airbnb for that month that you’re using, and just file it away. You know, then that way if the IRS were to challenge it, you have something to substantiate it with.

Kevin Pho: Now, are these documents something that a clinician can do themselves, or would they need help with an attorney or a tax advisor?

Alexis E. Gallati: Yeah, most of the time you can probably go online, and you just want to make sure you’re finding a reputable source or resource that can provide a rental agreement. That’s something that we provide to our clients, and they’ve already been checked and verified that they’re good documents. But yeah, you can go online to like LegalZoom or any of those other platforms and be able to find a good rental agreement between the two of you.

Kevin Pho: So we talked about the example where a physician can rent their house for, for instance, a monthly board meeting. Any other case studies or examples where a physician can use the Augusta Rule?

Alexis E. Gallati: Yeah, employee parties are a really great way to do that. If you do have employees, then you’re able to rent your home to your business for that event. Also, if you have any other, if you’re, like I said, trying to court any potential new vendors or contracts, or even if you have other physician friends coming over that you know you’re going to be talking business. As long as there’s some sort of recorded business intent to that meeting, then usually the IRS doesn’t have any issue with it. And so again, it’s about documenting and not trying to get too cheeky as well.

Kevin Pho: So in order to bring that example to life, what would be a hypothetical case study, or you could use an anonymized example, of the amount of tax savings one can expect, or that you’ve seen, using one of these examples of the Augusta Rule? What kind of dollars are we talking about that you’ve seen?

Alexis E. Gallati: Sure. Yeah, so it really depends on that rental rate and what you feel comfortable taking. But let’s just say even conservatively, you know, at $500 a night, and so that’s about $7,000 a year of a deduction. And so obviously depending upon your tax rate, your effective tax rate, so if you’re looking at maybe somebody that’s in California for example and in the highest tax bracket, then you’re looking at easily maybe $2,000 to $3,000 tax savings for that deduction.

Kevin Pho: Now, do you see the IRS potentially closing this loophole, because people are using it this way perhaps, sometime in the future?

Alexis E. Gallati: Potentially. I wish I had a crystal ball. But I think that as long as there’s not a ton of abuse with it, then the IRS will keep it. I mean, the home office deduction for example has been around for a really long time, and there’s a lot of people out there that think, oh, this is going to trigger an audit by having this home office. Well, even if it did, as long as you qualify for it and you’ve documented it properly, then there’s absolutely no reason why that deduction would be denied.

Kevin Pho: So if a physician is interested in using some of these ideas that you’re talking about, just tell us what the first step is that they would do. Should they approach their accountant or financial advisor that this is something that they may be interested in?

Alexis E. Gallati: Definitely. I think really the first step is getting that education, through the article that I wrote for KevinMD, or going to other trusted sources, and making sure that you understand the steps that are needed as well as documentation. So then that way, if you want to do it yourself, it might take a little bit longer and you might have to come up with these documents yourself. Or going to a trusted advisor that has already done this strategy and can be able to lead you in the right direction a little bit quicker.

Kevin Pho: We’re talking to Alexis E. Gallati. She’s a tax strategist. Today’s KevinMD article is “How doctors can use the Augusta Rule to save on taxes.” Alexis, we’ll end with some of your take-home messages that you want to leave with the KevinMD audience.

Alexis E. Gallati: Yeah, really I want to make sure that y’all are just proactive and that you’re getting your education, because really that’s the number one way that you’ll be able to better your tax situation, is going out and looking at the different tax strategies that are available to you and then cherry-picking the ones that would work best for your situation. And then obviously always continue to be proactive with that learning, because there’s new strategies coming out all the time.

And so that’s why I have Cerebral Wealth Academy, that does help physicians and other medical professionals to learn more about taxes, tax strategies. I wrote the book Advanced Tax Planning for Medical Professionals, and that just was a brain dump for me to just get the ideas out into the world and just to introduce physicians to the different types of strategies available, all the way from hiring your kids to going into real estate or charitable trusts, things like that. That’s really where that first step into knowledge is, and so then that way you can bring those ideas to your tax professional or dig deeper into those strategies.

You know, unfortunately one of the problems with the internet is there’s a lot of bad information out there. And especially with AI now, it’s so easy to just kind of tap things into ChatGPT and assume that the information is correct. So making sure you’re just doing your due diligence along with that.

And really starting early. I mean, I know it’s the middle of the year right now, but you really need to start thinking now about what you want to achieve for the rest of the year, because once December 31st comes and goes, you’re left with a lot less ideas. And with Cerebral Tax Advisors, we are a white-glove, do-it-for-you type of tax service that will allow you to cut through all the bad information out there and get you a nice streamlined plan to maximizing your taxes.

Kevin Pho: Alexis, thank you so much for sharing your perspective and insight, and thanks again for coming on the show.

Alexis E. Gallati: Thank you so much, appreciate it.