No Such Thing as Passive Income
Passive income can be a great way to help you generate extra cash flow, whether you’re running a side hustle or just trying to get a little extra dough each month. But is it all just a hidden lie?
Types Of Income
Income falls into one of two categories: passive and active income. While most people have heard about passive and active income, many are unsure of the difference between the two or how to earn passive income.
Many believe that understanding how to create passive income is the key to building wealth and financial freedom. As Robert Kiyosaki 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 received for performing a service, such as working a full or part-time job and receiving a salary, commissions, or tips. Earnings generated from self-employment or materially participating in a business and getting paid are two other forms of active income.
What Is Passive Income?
Passive income is money generated from investments, properties, or side hustles. The goal is to achieve a steady flow of cash without the daily commitment of a full-time job. Kevin Voigt, Andy Rosen.
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 the tax deduction mechanism and is taxable.
Real Estate…Passive Income?
Investing in real estate is considered passive income because you’re generating revenue from 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.
Buy-And-Hold Investors
Passive income from real estate is generated by buy-and-hold investors in two different ways: Recurring net income after tenant rents have been collected and the bills have been paid, and from the potential profit from appreciation earned when a home is sold.
Many investors describe passive income from real estate as making money 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.
Is Passive Income Taxed Higher?
From rental real estate, is not subject to high effective tax rates. Income from rental real estate is sheltered by depreciation and amortization and results in a much lower effective tax rate.
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