There's No Such Thing As Passive Income
“Passive Income” can be a great way to help you generate extra revenue, whether you’re running a side hustle or just trying to get a little extra cash each month. Is this all just a hidden lie? In reality, there’s no such thing, in the sense that you literally do nothing and earn money. Somewhere, some work is involved.
Types Of Income
There are two categories of income: that we are going to cover. Most people have heard about one of these two terms. A lot of people don’t seem to know the difference between the two or how to earn passive income.
Most people believe that an understanding of how to create passive income is the key to building wealth and financial freedom. Robert Kiyosaki once said, “The key to financial freedom and great wealth is a person’s ability or skill to convert earned income into passive income and/or portfolio income.”
What Is Active Income?
Active income is money a person earns for performing a service, like working a full or part-time job and receiving a salary, commissions, or tips. Earnings that you make from self-employment or materially participating in a business and getting paid are two other forms of active income. Essentially, if you are directly working, and receiving money in return, you can pretty much call that active income.
What Is Passive Income?
Passive income is money earned from investments, properties, or low stress side hustles. The goal is to achieve a steady flow of cash without the daily commitment of a full-time job. Passive income is a type of unearned payment that is acquired automatically with minimal labor to earn or maintain. It is often combined with another source of income, such as a small side hustle. In the United States, the IRS divides income into three categories: active income, passive income, and portfolio income. Passive income, as an acquired income, is the result of capital growth or is related to tax deduction and is taxable.
Real Estate...Passive Income?
Investing in real estate is considered passive income because you’re earning money from other money you’ve already invested in the property. Even if you’re materially participating as a landlord to your investment properties, it’s still considered passive income.
Real estate can generate active or passive income, and sometimes a combination of both. The type of income generated from real estate depends on an investor’s strategy and whether the investment objective is to generate potential income over the short term or long term.
This type of income from real estate is generated by investors in a few different ways: Recurring net income after rent has been collected from tenants and the bills have been paid, and from the potential profit from appreciation earned when a home is sold.
Many investors describe passive forms of income from real estate as making money for doing nothing, even when you sleep. In fact, the political economist John Stuart Mill has been quoted as saying, “Landlords grow rich in their sleep without working, risking or economizing.” Earning income from real estate does require some work, even when the day-to-day details of managing a rental property are delegated to a local property manager. There’s always some work that must be done.
Is Passive Income Taxed Higher?
Income generated from rental real estate, is not subject to high effective tax rates. Income from rental real estate is sheltered by depreciation and results in a much lower effective tax rate.
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