Gelt's Tax Glossary

The income is completely tax-free regardless of the amount. It’s named after Augusta, Georgia (home of the Masters golf tournament), where homeowners commonly rent their homes during the tournament. In tax planning, this is sometimes used by business owners who rent their personal home to their own business for meetings or events, generating a tax-free payment to themselves while the business takes a deduction — though proper documentation and fair market rent are important to withstand IRS scrutiny.

Normally, rental losses are “passive” and can only offset passive income. To qualify for REPS, a taxpayer must spend more than 750 hours per year in real estate trades or businesses and more than half of their total working hours must be in real estate. When qualified, rental losses can be used to offset other income (like W-2 or business income), which can result in significant tax savings — especially when combined with accelerated depreciation strategies like cost segregation.

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Shareholders report the flow-through of income and losses on their personal tax returns, and are assessed tax at their individual income tax rates. This avoids the “double taxation” that applies to C-corps (where income is taxed at both the corporate level and again when distributed as dividends). A key tax benefit is that S-corp owners can split their income between a reasonable salary (subject to payroll/self-employment taxes) and distributions (which are not), potentially reducing overall tax liability.