The Short Term Show The Truth About Material Participation Rules with Karlton Dennis
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Sep 17, 2025 
Karlton Dennis, a licensed enrolled agent and founder of Tax Alchemy, shares his expertise on real estate tax strategies for investors, focusing on short-term rentals. He explains material participation rules and how they impact audits. The discussion includes leveraging cost segregation and bonus depreciation to generate paper losses, misconceptions about hour-tracking, and the timing of acquisitions. Karlton also highlights common audit pitfalls and when investing in condos makes sense, providing valuable insights for savvy property owners.
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Bonus Depreciation Amplifies Cost Segregation
- 100% bonus depreciation plus cost segregation lets investors accelerate large paper losses in year one.
- Those losses can offset active income and effectively make the government subsidize real estate purchases.
Prioritize High Building-To-Land Markets
- Check the building vs land allocation because only building value depreciates for tax purposes.
- Buy in markets with higher building ratios to maximize depreciation (e.g., Florida vs California).
Old Rules Apply To Modern Short-Term Rentals
- The passive activity loss rules from 1986 still govern today and predate Airbnb.
- The IRS treats transient hotel-like rentals as potentially active businesses under those rules.
