[00:00:05] Speaker A: Welcome to the Short Term Show. The show about short term rentals and long term wealth with real property owners hosting real properties who are crushing it in the vacation and short term rental space.
And here's your host, Avery Carle.
Hey, y'. All. Welcome back to another episode of the Short Term Show. It is the end of September. We have the lowest rates we have had in a year. I wouldn't say the market is heating up, but it's definitely, it's trickling back. And the, the floodgates have not opened, but we are seeing a trickle of.
A lot of our listings are selling. We had 200, so that's a lot of listings. And we're starting to see a lot of those get snapped up.
Buyers are kind of picking up. So it's definitely a very opportune moment at this point in the year, at this point in the economic cycle to talk again about the short term rental tax loophole and, or terminal tax strategy. I think we don't like saying loophole. Right. So anyway, I've got one of the best to talk with me about this today, Carlton Dennis. You might have heard of him. He. He's got a company called Tax Alchemy. Excuse me. And he's got about 1 trillion followers and subscribers across all social media. So you've definitely seen him. If you're listening, you've seen him. But anyway, I'll let Carlton introduce himself. How's it going, Carlson?
[00:01:39] Speaker B: I'm doing well, Avery. It's a pleasure to be out here in Florida. I get why you live out here. And the laws are a lot more favorable for landlords here in Florida than it is from where I'm from in California. But for those of you listeners out there, my name is Carlton Dennis. I'm a licensed enrolled agent. I'm an avid fan of the tax code, which is kind of weird. And you don't run into too many people that love taxes, but I do, and I get to work as a tax strategist. I help people figure out ways to reduce their tax before they get into their CPA's office. And it's been pretty fun being able to help clients, you know, unlock some of the secrets of the tax code, especially as it pertains to real estate, to be able to offset active forms of income.
[00:02:17] Speaker A: You know, I used to not be a fan of tax. I'm still not a fan of paying them, but I'm definitely a fan of the tax code now that in the past, you know, I don't know, I guess decade of my Life. I've learned that the government will basically pay you to buy vacation rentals indirectly.
And I love that.
[00:02:36] Speaker B: Yes, yes they do. Yes they do. And it's all in the math because Donald Trump signed into law the Big Beautiful act, which became the big beautiful bill. July 4th, 2025, and we had bonus depreciation climb back up from 40% to 100%. But most people don't understand how big of a deal this is as it pertains to real estate. When you make a down payment on a house, let's just say a half a million dollar Property, you put $100,000 down.
Writing off the building's value is such a big deal, we call it depreciation on the tax return. But the issue is, is that you take that, write off that building value over the course of 27 and a half years. Who knows where, where we're going to be at in 27 and a half years. So what most savvy real estate investors would, would do is they would perform the strategy called the Cost Segregation study. This essentially allowed for them to take more of that depreciation upfront in the first couple of years of ownership, as opposed to spreading out the depreciation over the course of that 27 and a half years. Now you used to be able to see investors prior to the Big Beautiful act only being able to receive around 50, 15, maybe 10% of their buildings value as a year one tax loss or year one deduction with this cost Segregation study. But now that we have that big beautiful bill and we have that 100% bonus depreciation, the government is paying us to buy real estate. When you make an investment on an investment property, maybe you're putting that $100,000 down on that half a million dollar property. Now you're receiving close to 20 to 25% of of that building's value coming back to you in the form of a paper loss, sometimes even upwards to 30 or 40%. So we have clients that are, you know, capturing maybe 150, $200,000 in a year one loss on a half a million dollar property. Which is pretty awesome.
[00:04:30] Speaker A: That is awesome. And since I have you here, I will say this and you can correct me if I'm wrong, the kind of very extremely loose way that I explain it to our clients who may not be familiar with it yet, is you're basically allowed to reduce your taxable income on your W2 by the amount of your down payment on the property. Ish, Depending on a few things about the property and the way the cost segregation is done. Am I completely off base in saying that?
[00:04:58] Speaker B: No, you're not off base at all. I mean, it pretty much aligns up pretty well. What the math comes down to is the building value versus the land value. So when you go to purchase real estate, you're buying two things. You're buying the building and you're buying the land. Unfortunately, the IRS only gives us a tax deduction based off of the buildings amount. So if you go buy real estate in like, let's just say California, California has really expensive land. If you go buy $1 million property out there, maybe 600,000 of that acquisition cost is dedicated to the land. Maybe only 400,000 is dedicated to the addition or the building. That means that you only get to take 400,000 as your tax write off over 27 and a half years. Now if you move over to places like Florida or the Smoky Mountains, for example, you're going to see a big shift in the building to land ratio. It's closer to about 85% building, 15% land. So on a million dollar property, I might be looking at $850,000 of total depreciation as opposed to a property maybe in California where I'm only getting about 400,000 of total depreciation based on the building to land ratio. Now that down payment situation that you brought up, Avery, is really where I get excited is because I can make a down payment on $1 million property and put $250,000 down if I'm going to go and you know, really make sure I'm getting to that 25%. But I might be able to receive 300,000 back in a year, one loss. And that 300,000 can go to offset active forms of income, which is W2 income, rental income. Even if you have capital gains income up to a certain extent, you can use real estate losses as active losses as long as you're abiding by the IRS's short term rental rules.
[00:06:42] Speaker A: And let's really quick actually, before we get into exactly what their short term rental rules are, let's do a quick definition, a recap of exactly what the short term rental strategy is in the tax code. Because we've talked a little bit about what it does, but what is it? How does it work?
[00:06:58] Speaker B: Yeah. So you know, back in 1986, we had Ronald Reagan and he decided to incorporate the Tax Reform Act. At that time we got introduced to the differences between non passive income and passive income. And he created some rules called the passive activity loss rules. All this means to you and I, Avery is, he's defining now what is considered active in real estate versus non active in real estate. Because by nature, real estate is pretty passive. Once you purchase a property and you have a tenant staying in there, you're normally collecting rent. Unless you're running more of a short term rental business.
Well, Airbnb and VRBO weren't around back in 1986. Right. They came out closer to 2010, 2013. And so when we look at the tax code, which still exists, it has not been updated. The passive activity loss rules have not been updated since 1986.
We can be able to define what is a short term rental. Back in 1986, when there was no Airbnb and VRBO and it was hotels and motel like businesses, the IRS deemed hotels and motel businesses to be transient type business businesses, meaning customers come in and out less than seven days on average. And by IRS definition, they viewed hotel and motel businesses as active businesses in the eyes of the irs, even though it's technically a rental property. Right. And so fast forward to today, we have taxpayers that are utilizing the, this strategy, the ability to rent out a property on a transient basis like a hotel or motel like business, and classify it as an active business on the returns. Meaning if you have deductions, those would be active deductions that you can use to offset your active forms of W2 or 1099 income.
[00:08:48] Speaker A: That is really cool. And you know, I was, I'm reading a book right now that is called.
The title is.
I don't want to even say it because people are going to be like, why do you invest there? So there's this area I'm going to have to explain, a little bit of Florida and then over into Alabama. So Gulf Shores, Alabama, all the way across the Florida Panhandle to Panama City Beach. It's called the Emerald Coast. In the past, it has been called the Redneck Riviera. Riviera, because people like myself from the Southeast, this is where we come to vacation.
And we're not all rednecks. But there are a number I am not, but there's a number of rednecks and especially in certain parts of the Emerald coast had a worse reputation about this than others. But anyway, I read this book that I got from a local bookstore called the Rise and Fall of the Redneck Rivy Era, because it is no longer redneck now. It's extremely upscale.
And what I learned was it's basically a history of vacation rentals in this area. And they've been around since, since the 1800s. And it's really cool that the entire area, the whole Florida Panhandle on Particle Shores, has been dependent on vacation rentals for that long. So when I hear people who are like, oh, Airbnb is over, it's maybe, you know, maybe the type where you're going into your grandmother's neighborhood in Indianapolis and buying starter homes and calling and putting it as a short term rental. Yeah, maybe that is. But the true, like, vacation rental asset class far predates Airbnb and the Internet in a lot of cases. So, you know, I wonder if back then they thought about that, you know, up northeast, you know, wouldn't be the Redneck Riviera, would be places like, you know, Martha's Vineyard and Nantucket and, yeah, stuff like that. But we're called the Hamptons of the south here nowadays, not the Redneck Riviera.
[00:10:40] Speaker B: You know, this is the first I'm ever hearing of the Redneck Riviera. But to your point, I bet maybe that was brought up, right? Maybe that was taken into question because when you think about the way some of these laws are written, it's based on things that are already in existence, like the Augusta Rule, right. People are already renting out their houses to other people for 14 days down in Augusta, Georgia for that golf tournament. And then it became the Augusta Rule later, where business owners can rent their houses to their businesses. So many cool tax strategies that have come from history.
[00:11:10] Speaker A: Yep. Yeah. Love it. So anyway, that is what the tax code says, and then you put it into practice on buying vacation rentals, short term rentals, Airbnbs, whatever it is you want to call it, so you're able to use that depreciation to offset your income. Now, this is a lot of times presented as a strategy for high income earners. So what would you classify as a high income earner who it might benefit to use this strategy?
[00:11:39] Speaker B: You know, to be honest with you, you can utilize this strategy whether you're deemed high income or not. It's just whether or not you're at that point where you have the investing power to jump into a short term rental. Because most people jumping into real estate, at least on the investment side, might have to come up with that 20% down payment unless they got a single family home and decided to convert that single family home that was their personal residence into a short term rental. So normally we see customers jumping into their first rental property right, when they have around $100,000 saved up or they're making close to around 250 to $300,000 combined income between husband and wife or one spouse on their own, ranking around $300,000 a year. That's when it really starts to become an issue around the amount of taxes you're paying every year. Because if you're making close to 300k, you're paying about 59,000. Let's just round up 60,000 in taxes. Coming out of college, I made $55,000 for an entire year. So that shows you how much time, you know, people are trading to just pay for taxes. And so if we can go ahead and start focusing on some strategies right around that amount, we'll be able to reinvest our dollars into some assets that hopefully will be able to offset our taxes and continue to give us cash flow at the exact same time.
[00:12:51] Speaker A: That's exactly what I was hoping that you would say, because I actually saw something online today where somebody was like, well, what if I don't make 200,000?
You can still use it. You just might not have as much income that you need to offset so you can buy a cheaper property technically.
So it's for everybody. It's not only for high income earners, but it does happen to be really handy for high income earners.
Now let's move on and talk about. There's a few tests that you have to meet to be able to use this there. It's called material participation. If you've ever looked this up online or been in a Facebook group, which. I'm over Facebook, by the way. I'm over Facebook groups. They're garbage now. But it's just, it's just you're like drunk uncle yelling at the tv, complaining about everything. There's no real, like help or information in there anymore. But anyway, that's not what we're talking about. I saw in a Facebook group though, everybody's asking about material participation. And so let's talk about material participation, what that is and how that pertains to being able to execute this strategy.
[00:13:55] Speaker B: Yes. So material participation is very unique because when it was written into the tax code, it created a lot of confusion for tax accountants and for taxpayers. But to sum up what material participation means, it's your active involvement in something.
Now, the. In order for the IRS to judge what your active involvement is in something, they had to create tests around this. And so material participation is actually seven different tests. But here's the case.
Even though it's seven different tests, the IRS allows for you to choose any one of these tests in order to justify you being what they deem actively involved or materially participating. Now, moving away from material participation, let's look at an Airbnb. If I have an Airbnb, I'm going to have to probably be somebody that is either showing up to the Airbnb myself to make sure I'm turning over the sheets or cleaning up the property, or I'm going to hire somebody to go ahead and manage that Airbnb for me. The IRS knows that if I hire somebody to go manage the Airbnb for me, I'm technically bleeding over into more of that passive lifestyle where I don't really have as much active involvement, but someone else has active involvement. So this is why they have to put these tests in place to deem are you really materially participating? Are you actively involved enough that will allow for you to get this tax incentive? The tax incentive is we're going to count your deductions as active instead of passive, so we can. So you have the ability to offset your active forms of income. So what you hear most people say when it pertains to the short term rental strategy is I just need to spend 100 hours. But that's not the only part. You have to spend 100 hours and more time than any other person that's helping you. Meaning if I hire a handyman or cleaning lady, I technically have to track their time to to justify in an IRS audit that I spent more time than any other party that was helping me run this business. That is how many taxpayers are using the short term rental strategy to be able to create an active deduction against their active forms of W2 and 1099 income.
[00:16:05] Speaker A: So 100 hours and more than anybody else. And so what are the other tests? It seems like that's the main one that people use because I think it's probably the easiest to execute. But what are the other ones? Just for reference?
[00:16:19] Speaker B: Yeah. So the other test is the transient basis test. So keep in mind, when material participation was written into the code back in 1987, short term rentals were defined as transient based properties, meaning the customer is staying on average in the year seven days or less amongst all guests. So if I count up all of my guests that have ever stayed in my property and the average of their guest days is seven days or less. I have an active business in the eyes of the IRS. If I've also met test number two, I materially participated. I spent 100 hours and more than any other person. So this is what gets you to that status of a real estate professional. Someone who's able to show the IRS that you're running an active real estate business so you can take active deductions against your active forms of income.
[00:17:05] Speaker A: Got it. And how do we track are ours? I've, I've seen people, I just started seeing people this year say things like, I got audited and I lost. And there was one because I interviewed every single one of them. I wanted to find out why. And there was one common thread on all of the people who did not pass their audit. Some people did. A lot of people made it through. But I would be interested to hear what your opinion is as to why somebody, why this might trigger an audit or, and how to avoid failing that audit.
[00:17:40] Speaker B: I can almost guess why your clients either won or lost their audits because of how many court cases I've read on the short term rental strategy. It's very simple. If you do not track your time and then you have to go back and recreate your log booklet and your log booklet doesn't line up with where you were at in the world, meaning I can pull your bank account transactions and see that on January 14th, even though you said you logged time at your rental property, that you were actually in your home in Tucson, Arizona and you ordered food from McDonald's that got shipped through Uber that day. Yes. These are how detailed the IRS can go when it comes down to your log booklet, especially when you have to recreate your log booklet. Now, let's just say you did have your log booklet. Did you track other people's time that was helping you? For example, did you hire a property manager? Because if you did, oh, that means you have to track your properties manager's time because you've essentially signed away your material participation on a dotted line when you said, I want somebody else to manage this property for me. Now, it doesn't, it doesn't say in the code that you can't have a property manager. But court cases have cited in the favor of the IRS for people who have hired property managers because by nature it shows that you're trying to make the business passive. So that means you're going to have to track the property manager's time. If you didn't track your cleaning lady's time or your handyman's time and they've been helping you manage the property or they've been inside of the Airbnb app communicating. This can also cause you to lose an IRS audit if you don't have that information. And last but not least, research time and investor related time you Sitting at home on your computer, shopping rentals. And that makes a majority of the hours in your log booklet. The IRS hates to see this because it does not impact the day to day operations of your investment property.
[00:19:21] Speaker A: Yep. That was the exact reason that people did not create their law like log their time at the time they were doing it. They went back and did it later and things didn't line up. So. So, yep, that's exactly what happened.
So guys, it's. It sounds like a hundred hours. It sounds like a really lot of hours to have to participate, but it's really not that much. So by the time I do recommend, if you're trying to execute this, going to your property and getting it ready to rent yourself. So replacing any furniture, a lot of the stuff we sell comes furnished already, so you're not having to furnish from the ground up. But that would be a lot of hours getting things set up, interviewing cleaners, interviewing handyman, people like that. But there's a lot of things that I think that people don't know whether it counts or not. So Carlton, I'd like to kind of play a little game with you. Just yes or no answer. And I'm going to name some things that I might try to count on my logbook and you tell me yes or no.
[00:20:18] Speaker B: Okay, Sounds good.
[00:20:19] Speaker A: Okay.
Cruising properties on Zillow. No, flying to an area to go look at properties that I'm not yet under contract on.
[00:20:30] Speaker B: The flight time technically would not count. Now if it makes up a majority of your time is travel, the IRS is going to look at that and say the travel time doesn't impact the day to day operations of how your property goes. But we have seen court cases where there have been log booklets that did have travel time, such as a eight hour traveling trip from San Francisco down to Los Angeles, things of that nature. That travel time was deemed okay by the irs.
[00:20:57] Speaker A: So.
[00:20:57] Speaker B: So there are some court cases that yes, have side in the favor of people that have put travel time on their log booklet. But there are court cases that have not cited in favor of the taxpayer because a majority of their time was spent in the air traveling to these properties. So it cannot make up a majority of your hours.
[00:21:15] Speaker A: Okay, good to know.
Taking a course, learning how to manage a short term rental.
[00:21:22] Speaker B: No, that's just education.
[00:21:24] Speaker A: Okay.
Buying furniture online. I'm not at the property, but I am.
[00:21:29] Speaker B: Okay, absolutely. You can, you can definitely count the time that you use to shop furniture. If you're bouncing from website to website. If you're putting Together a Google document to present to your wife to be able to say, hey, here are the three options. I put it into a PowerPoint presentation. How do you want the property to look? That's what I did for my wife and I spent time building the presentation. All of that time counted. So yes, absolutely.
[00:21:51] Speaker A: Awesome. Love that time. If I'm at my property getting things ready and I'm spending the night there for several days sleeping at the property, yes, that counts.
[00:22:01] Speaker B: Why? Because if you are trying to determine if your property is up to par, wouldn't you want to test things? Wouldn't you want to test the coffee maker? Wouldn't you want to test the mattress? Wouldn't you want to test the swimming pool, the jacuzzi? These are absolutely things that you can do in order to make sure that your property is rent ready. Now, if it makes up a majority of your time, then it can look like you only slept in the property. To try to garner hours for the sake of material participation, I'd highly recommend that you only use maybe one night to justify being in the house for the sake of needing to sleep on the mattress.
If you're going to be claiming hours for the mattress or if you're staying overnight at the property, the time that you have that is sleeping should only be one day dedicated to you testing the mattress the following day. You should not count that sleeping time.
[00:22:47] Speaker A: Got it. Driving to and from Home Depot.
[00:22:51] Speaker B: Yes, absolutely.
[00:22:52] Speaker A: You're picking driving counsel.
[00:22:54] Speaker B: Yes, it does.
[00:22:55] Speaker A: Other ones that I've heard people.
So education does not count? I think that's the biggest one.
All right. I think, I think that's it.
[00:23:05] Speaker B: Yeah. So research, research and education are the two biggest ones that the IRS tries to attack.
Any. And this is the basic way to remember this because this is what comes up in an IRS audit. Is what you're doing impacting the day to day operations of your property? Does it make your property go?
And if you can say, if you can't say yes, definitively likely it probably doesn't count as material participation. Me getting to my property, me making changes to my property, that's going to make my property go. Me driving to Home Depot and going to get a supplies that's going to aid my property. So all of that is me being on the job. Right. But if I kind of take the job hat off. And I'm just doing research, I'm just doing education, it may not impact the day to day operations even though it's important to do research and education.
So it definitely should not make Up a majority of the hours. Can I sneak in a few hours? Most likely, but it should not make up the majority of the hours that are on my log booklet.
[00:23:56] Speaker A: Gotcha. And you should be doing that at the time that you're doing it. You know, take a picture of your Home Depot receipt.
Put that. I would use a. I don't have to do this because I'm real estate professional status, but use a, like a Google Drive and have pictures of your receipts and then you have your time log so that everything is right there for everybody to look at very easily.
[00:24:16] Speaker B: That's exactly what I do. Absolutely.
[00:24:19] Speaker A: Awesome. Awesome.
So let's talk about any other pitfalls in terms of logging your hours or potential audits before we move on to the next question.
[00:24:30] Speaker B: Just understanding that when you're trying to take advantage of the short term rental strategy and you're buying more than one short term rental legally, you have to spend 100 hours on each property unless you're making a grouping election.
The IRS does allow for you to make a grouping election where you can group one passive activity into another activity and then you can just make both of the activities non passive by your material participation just on one property. So this is a really awesome, awesome situation because let's just say that you have three short term rentals and two of them are being managed by a paid property manager. You can spend a hundred hours on one property and more time than any other person on that one property and then make a grouping election to group into your your other two properties that might be managed by a paid property manager. That is allowed by the irs. It's called a grouping election. You can also do that as a real estate professional as well.
[00:25:22] Speaker A: Good to know. I didn't know that one.
[00:25:24] Speaker B: Pretty awesome.
[00:25:25] Speaker A: Yeah. Yeah. Okay, so now we're coming up on timing. So we're again at the beginning of or end of September now and it's probably a really good time to end the year to buy a short term rental so that you can get those a hundred hours.
In my opinion, and I want to hear what yours is, I think it's best if, if you're somebody who isn't making a career out of being a real estate investor, you're keeping your W2 job. But maybe you're buying one short term rental a year to keep your taxes lower.
I recommend buying right before Q3, I mean right before Q4, at the end of Q3, so you have an easier time making sure because you're only owning it for three to four months at the end of the year that you are spending more time than everyone else. So if you own it for 12 whole months, you've got a lot more tracking of cleaners and handymen and it might be possible that they might spend more time than you. So in my opinion, you want to buy later in the year, but I'd love to hear yours.
[00:26:22] Speaker B: That is exactly what we advise our clients to do, especially some of our clients that are just so busy. We want to make it as easy as possible for them to get the most amount of savings as possible. And one of the ways in which they can do that is by timing out when they go into escrow. If we go into escrow right towards the end of September, which hopefully we get another rate drop, I'm hoping a rate drop comes. If we go into escrow right towards the end of September or October, we can then ensure that you have that Airbnb up by at least the end of October, if not early November. And all you need is just a few guest days. You really only need about two to three guests to stay in your property before the end of the year and make sure you spent more time than any other person. And now you can lock in those tax savings. You can perform that cost segregation study. It can carry over into your tax returns and then in the following year you have a choice. Do you want to run a short term rental? Is that your desire? Or do you want to convert it into a long term rental because you have the option to be able to put it into a portfolio of long term rentals or just leave it as a short term rental and manage it yourself or have a paid property manager.
[00:27:23] Speaker A: Yes, I think in. If you're buying in a market where it's probably not going to work to convert it to a long term rental. Like Nothing here in 30A. Like I'm not going to be able to convert a five bedroom beach house into a long term rental. There's nobody that's going to rent it. There's no jobs here. 30 the restaurants close for the season.
So what I would recommend is if you're buying in a true vacation market like this would be just to put it with a traditional property manager afterwards if you're. If you decide you don't want to manage it, in my opinion, if you want to keep that cash flow rolling in, it's really, if you're buying one a year, it's really not that difficult. It's going to be an hour a week, not cumulatively, not all at once to manage one short term rental. And then once you get a year under your belt of knowing how to do that, you can hire a VA rather than paying somebody 20 to 25% of your gross income to do what, in my opinion is VA work.
And you can save a lot of money that way, but you're still not in it every day when you're trying to work your job too.
[00:28:25] Speaker B: So I 100% agree. That's. That's the method that most of our clients are starting to take, especially those that have about two properties now, is they've started to offload a lot of that management over the Airbnb to the VAs and created a system to where the VAs are inside of the Airbnb app and their timing, how long they're working every day and creating their material participation on top of that. So you can set up a really good system to be able to continue to scale and buy one property a year and then convert it and add it to your portfolio.
[00:28:55] Speaker A: Love that.
So I've got one more question that I hear a lot that I really don't know the answer to and I'm hoping you can help me with.
So we get a lot of clients who are like, well, I'll buy a condo because that doesn't have any land value and they think that that will be better for a cost than not. And I would love to hear your opinion on that.
[00:29:16] Speaker B: Yeah, I mean, some condos do have just 100% building value if they're not on the ground level. So we've seen some pretty strong cost irrigation studies. But to be honest with you, majority of our clients that have gone into the condos don't cash flow very well. They get frustrated with their condos after a year or two and try to 1031 or sell them.
And most importantly, you don't have control over what you want to do from a renovation perspective, to the fullest extent at least. And getting out of them, you may not get that appreciation that you were hoping for. So that can also be a little bit of a risk. Any, like anything else, you have to be in the right market. You have to not time it. You have to be in the right market and you have to know what you're looking for because you can kind of get a little bit stuck with a condo.
[00:30:00] Speaker A: Yeah. Yeah. So like here, condos are great. Myrtle beach condos are great. But, you know, Dallas probably not.
[00:30:07] Speaker B: No, Dallas, I would say probably not. Yeah, you're not, you're not going to find a whole lot of in my Mind a whole lot of appreciation in a condo in Dallas, let alone get a whole big cost sake out of a condo in Dallas either.
[00:30:18] Speaker A: Gotcha. Okay, great. Now I know what to say when, when we get those questions from clients. So, Carlton, is there anything else now that we're coming towards the end of our time that I have not asked that we should talk about?
[00:30:32] Speaker B: Well, one thing that I want to make sure real estate investors understand is that if you're managing your own investment property, you have an opportunity to not only set up an LLC for asset protection for the property, you can set up an LLC for rental management.
The rental management LLC could allow for you to take expenses you thus wouldn't have been able to take because you're now a property manager. So you can have a rental management company vehicle. You can make sure your travel is being accounted for inside of that LLC instead of your LLC that's holding your property. And then you can also place children on payroll if they're helping you out to a certain extent, which allows for many of my clients to also be able to contribute to the Roth IRA for their children.
And most importantly, maybe you have a spouse that's claiming the real estate professional status. And it makes sense in the eyes of the IRS for you to have more of a bona fide position and establish an LLC so you look legitimate. And you can also be able to place a spouse on payroll if it makes sense. As rental income starts to grow, we have clients that have portfolios of 40, 50, 60 doors now and there's enough cash flow that it's that they're placing their spouses on payroll through the rental management company and contributing to 401ks and creating retirement plans. So you know, the sky's the limit on how big you want to go with real estate. And being able to leverage the tax code at the same time can truly, you know, power that allow for you to grow your portfolio a lot quicker.
[00:31:51] Speaker A: Love that. Really, really great advice guys. So rewind that and listen to it again. So Carlton, at the end of every show that we have, we ask everybody the same three questions and we are going to do the same for you. So number one, what advice would you give 20 year old Carlton if you knew then what you know now?
[00:32:13] Speaker B: I definitely would have jumped into real estate a lot earlier. I had the opportunity, I had the money saved up and rather than jump, and I hope someone learns this from me, rather than jumping into real estate, I bought a Porsche. I'll be honest with you, I bought a beautiful black 718 Cayman and I was struggling to make the car payments when I probably should have invested that money into a four unit property in Long Beach. And I was looking at that four unit. I had the money to buy it, that four unit property, I sometimes take a look at it online. It's worth about two and a half million dollars now and it was only listed for about half a million dollars back.
You know, you miss out on some of those opportunities, but those are learning lessons, right? And now it keeps my ambition and keeps my fire for investing in real estate.
[00:32:53] Speaker A: Great advice.
And what advice, kind of along the same lines would you give a new short term rental investor who's looking to get started today?
[00:33:02] Speaker B: Don't just do it for the tax benefits. Please make sure that you find a property that is going to be cash flow positive. Because you won't enjoy the experience of being a real estate investor if you're constantly having to fork over some of your hard earned money. So to the property, it's no different than having to pay the irs, right? It's like it's just another payment you don't want to have to deal with. But if you structure this right and you slow down before you make an investment, you, you can get it right the first time. You can jump into real estate the right way the first time. And this can be a way to replace your, your, your working income if you stay at it long enough. But don't go into real estate thinking that within the first three years you're going to be retiring and living off a passive income. This is, this is truly a business that requires people to dedicate time to it. And if you go the short term rental route, it's an opt open up more tax savings for you on the W2 and 1099 side. Allow that to be reinvested. Don't just waste that money, don't just park it into your bank account. Truly reinvest that money and grow your wealth.
[00:33:56] Speaker A: Also really great advice. And last, what's your favorite book that's impacted your mindset?
[00:34:02] Speaker B: Ooh, favorite book that's impacted my mindset.
I would say probably this book called who not how definitely impacted my mindset. I was in a pivotal point in my career back in 2021 where YouTube was taking off and I was getting all this attention. And with all this attention I thought, well, maybe I just need to take all these phone calls myself and increase my prices. And I went from, you know, doing consulting at a couple hundred dollars a call to $900 a call and I went from you know, having 30 calls a week to 40 calls a week, to 50 calls a week, to 60 calls a week, and I'm like, what am I doing? I'm just continuing to trade my time for money. I'm not building a business that, you know, relieves me of the work. And it wasn't until I read that book, who not how, that I understand. Having the right type of people on your team can allow for you to open up your bandwidth and focus on the things that you're most passionate about. And for me, I'm a visionary. I like to come up with the ideas and share those ideas with the world and, you know, be able to disseminate that information down to my employees and allow for them to be the integrators, allow for you to take my ideas and know how to integrate what my vision is so we can take this company and move it forward. So that book, who not how was definitely impactful. And I'll give you one more, Avery, for your audience, just because I think this would be very important for some of the younger listeners. You know, as a young entrepreneur, I was struggling with what was going on inside of my head. There's a person that's inside of your head. Every single one of us has that person that you talk to, and it's hard to drown out that person. It can sometimes prevent you from crossing through doors that you're meant to go through. It can sometimes prevent you from accepting opportunities that you are truly worthy of accepting. And I read this book called Untethered Soul, which allowed for me to kind of connect a little bit deeper with my spirituality, understand a little bit more about that voice that goes on inside of my head so I could calm that person down and really kind of step into my confidence.
So for anyone out there that's looking to become more bold, that's looking to take on more in your life, you know that you that you're striving for more of a sense of fulfillment. It could come with, you know, just the fact that you have a little bit of self doubt maybe, you know, there's a lot of internal talk going on that you don't know how to shut off. Right. And so this book allows for me to identify that and it gave me the right type of tools to be able to do some of the things that I get to do today. So hopefully that helps.
[00:36:18] Speaker A: Awesome. Great recommendations. Love that. And very last, if our listeners want to follow you, how can they do that?
[00:36:25] Speaker B: Yes, you guys can go ahead and follow us on all, all social media platforms at my name Carlton Dennis with a K. And if you're ready to learn a little bit more about how you can use real estate to offset your bill, Visit
[email protected] We have helped over 700 W2 and 1099 investors get into their first short term rental or qualify their spouses as real estate professionals to offset their tax bill. We completely build out the tax plan and implement the cost seg so you don't have to worry about it.
[00:36:55] Speaker A: Awesome guys. Go follow him. Go learn. And Carlton, thank you so much for coming on.
[00:37:01] Speaker B: Absolutely. Thank you every for having me.
[00:37:02] Speaker A: It.
