Separating Fact from Fiction About the Augusta Rule and Home Office Deductions
Mar 28, 2025
This week, I had a fantastic micro-business consultation with Dr. K, a gastroenterologist who’s transitioning from W-2 employment to independent contracting through her new professional micro-corporation. She has chosen an LLC business entity and will elect to tax it as an S-Corp. Like many doctors stepping into self-employment for the first time, she’s asking all the right questions to me—and one of her questions in particular stood out as we spoke about how her home could be used for tax efficient business deductions:
"My parents think that if I use the Augusta Rule or claim a home office, it will hurt my home’s value when I sell it. Is that true?"
This misconception is surprisingly common among new micro-corporation/S-Corp owners, especially doctors. If you’ve ever wondered the same, this breakdown is for you.
Let’s separate the tax-smart tactics from the myths that could be holding you back.
🔍 The Augusta Rule: No Depreciation, No Risk to Home Value
The Augusta Rule, an enticing tax strategy named after the city in Georgia where it was popularized due to the annual influx of visitors for a major golf tournament, permits individuals to rent out their personal residence to their own business for up to 14 days each year.
The income generated from this rental can be excluded from personal tax returns, presenting a seemingly straightforward way to reduce taxable income. However, while this approach is particularly appealing and frequently adopted by physician micro-businesses due to its potential for shielding earnings from taxation without extensive regulatory burden, it is crucial to proceed with caution.
Adopting the Augusta Rule requires meticulous record-keeping and precise adherence to IRS guidelines. Any misstep or misunderstanding could lead not only to disqualification of this tax benefit but also expose the business owner to penalties or audits. It's important that those considering utilizing this rule ensure they are thoroughly documenting rental agreements and are charging fair market value rent for those days. Furthermore, staying informed about any changes in tax laws that might affect such strategies is vital. This cautionary approach helps safeguard against unintended consequences while leveraging the advantages offered by this legal provision effectively and responsibly. I always recommend working with a tax attorney to make sure you are doing this properly.
Using the Augusta Rule:
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Your S-Corp can deduct the fair market rental value of the space.
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You don’t need to allocate any part of your home as a depreciated business asset.
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There is no change in how your home is classified for tax or resale purposes.
Key Facts:
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No depreciation claimed = no depreciation recapture when you sell
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The house remains a 100% personal residence for IRS purposes
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The capital gains exclusion ($250k single / $500k married) remains fully available
💡 Verdict: The Augusta Rule does not affect your home’s value or your taxes when you sell. Period.
🏠 Home Office Deductions: Understand the Two Methods
When considering home office business deductions, it's crucial to proceed with caution and remain well-informed about the intricacies involved. The allure of claiming deductions for your home-based business expenses can be tempting, but it is essential to ensure that every claim aligns strictly with the guidelines set forth by tax authorities. These deductions can include a portion of your rent or mortgage, utilities, and even depreciation on property used exclusively for business purposes. However, incorrect claims or misinterpretations of eligibility criteria can lead to audits and potential penalties. One must clearly understand that the space claimed as a home office must be used regularly and exclusively for business activities. This means that the area should not double as a personal living space, which often becomes a gray area in many households. Familiarizing yourself with these rules and perhaps consulting with a tax professional will help safeguard against unwelcome surprises during tax season. By taking these preventative measures, you can confidently navigate the complexities of home office business deductions without falling afoul of regulations.
There are two ways to claim a home office deduction:
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Simplified Method
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$5 per square foot (up to 300 sq ft)
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No depreciation
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No impact on home value or taxes
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Actual Expense Method
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Includes depreciation of the business-use portion
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On sale, you must recapture depreciation (taxed at 25%)
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Applies only to the business-use percentage of your home
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Important:
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You still qualify for the full capital gains exclusion as long as you’ve lived in the home for 2 of the last 5 years.
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Depreciation recapture is minor unless you've been claiming it for many years.
🧠 Practical Reality: Will This Scare Off Buyers?
Here’s the truth from years of experience:
Unless you’ve made structural changes—like adding signage, separate entrances, or commercial zoning—your home is still a residence. The appraiser and buyer don’t know or care that you claimed a home office on your taxes.
What might really hurt your resale value? Neglected repairs, outdated kitchens, and bad landscaping.
Not using tax deductions because of imagined future buyer fears is a classic example of misplaced caution.
💬 Lessons from the Field
“This week, one of my coaching clients realized her employer had shorted her by over $40K on her W-2 salary. It only came to light because she’s now thinking like a business owner—auditing her income, contracts, and taxes for the first time.”
Dr. K’s story doesn’t stop with tax strategies. As she dove deeper into her S-Corp life, she uncovered an underpayment in her salary from her hospital employer. It wasn’t intentional—just another example of why doctors must monitor all aspects of their financial lives.
If you’ve never double-checked your pay against your contract… you should.
📥 Tool of the Week: Augusta Rule Rental Worksheet
“This downloadable worksheet will help you determine the fair rental value of your home for Augusta Rule compliance in under 10 minutes.”
🚀 Scale with Coaching
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🧭 Explore More Micro-Business Wisdom
Want to dive deeper into these strategies? Check out these related posts on The Independent Physician:
👋 Until next week, keep skipping the MBA… and mastering your micro-business,
Dr. Tod Stillson Founder, PEA-SimpliMD Best-selling author of Doctor Incorporated [email protected] | Schedule a Meeting
