Understanding Passive Income: Types, Taxes and Examples

Posted 2 years ago by Max Komonov

Passive income may sound like a听dream come true. Can you really make money without any听effort 辞谤听physical investment? The answer, in听some cases, is听yes.

It听is听possible to听bring in听passive income without actively working f辞谤听it. However, this does not mean there is听no听effort 辞谤听investment involved in听generating passive income.

There is听usually an听initial investment required, either a听financial investment 辞谤听work to听create a听product 辞谤听service. But once that initial work is听out of听the听way, passive income streams generate money without your direct involvement.

Sounds great, right? It听can be. But you should know the听ins 补苍诲听outs of听passive income, 补苍诲听how it鈥檚 taxed, before you dive in. So听what is听passive income exactly? How is听it听defined 补苍诲听taxed, 补苍诲听how can you start a听passive income business?

What is听Passive Income?

Passive income, as听the听name suggests, is听income that can be听collected with little to听no听personal involvement. The provides the听following definition f辞谤听passive activities:

Passive activities include trade 辞谤听business activities in听which you don鈥檛 materially participate. You materially participate in听an听activity if听you鈥檙e involved in听the听operation of听the听activity on听a听regular, continuous, 补苍诲听substantial basis.

There are a听few different ways to听collect passive income. Rental activities, selling certain products online, 补苍诲听business investments are among the听most common examples of听passive income sources.

The advantages of听being able to听generate passive income are obvious. Normally, you would be听limited by听time, resources, 补苍诲听energy in听terms of听how much money you can make. But passive income opens up听new opportunities to听make money without any听of听those personal restrictions.

With that said, passive income is听still taxed. Also, most people do听need to听put in听some initial work to听get the听ball rolling on听passive income.

What is听Passive Income Tax?

Some people might wonder if听passive income is听taxed 辞谤听not. And the听answer to听that question is听yes. Passive income may be听taxed differently than other income sources in听some cases. But, in听most cases, passive income is听taxed. What is听the听passive income tax, exactly?

A听lot of听passive income, but not all of听it, is听taxed similarly to听active income, 辞谤听your personal salary. You should make sure all passive income is听documented on听your tax returns, just as听you would your work earnings.

With that said, there are several exceptions 补苍诲听unique rules when it听comes to听passive income taxation. For instance, not all rental activities are counted as听passive income by听the听IRS:

鈥ental real estate activities in听which you materially participate aren鈥檛 passive activities if听you qualify as听a听real estate professional. Additionally, there鈥檚 a听limited exception f辞谤听rental real estate activities in听which you actively participate.

Essentially, what this means is听that real estate professionals who invest in听numerous properties do听not qualify f辞谤听passive income from rental properties. However, most other rental activities, such as听renting out a听garage 辞谤听in-home apartment, are considered passive income.

Additionally, taxpayers are allowed to听group certain sources of听passive income together in听their tax filings in听some cases. Passive income businesses that are geographically linked, 辞谤听share a听common customer base, may be听counted as听one passive income stream f辞谤听tax purposes.

What Passive Income Is听Not Taxed?

Certain types of听passive income are not taxed at听all. There are only a听few examples of听this, however, so听most passive income earners should be听prepared to听pay taxes.

For instance, some investment accounts, such as听a听401(k) 辞谤听IRA are not taxed. High-yield savings accounts 辞谤听other investment types are taxed, however.

There are also some exceptions when it听comes to听rental properties. Properties 辞谤听rooms that are rented out f辞谤听fewer than 14听days in听a听year do听not need to听be听reported as听passive income. Additionally, you may claim certain expenses if听you are involved in听the听management 辞谤听upkeep of听the听properties you rent.

Additionally, taxpayers can write off losses from passive activities on听their taxes in听most cases. However, in听most cases, you cannot claim a听tax deduction f辞谤听passive losses which exceed passive gains.

What is听a听Passive Income Stream Example?

Now that you know all that, you鈥檙e probably wondering about some passive income examples. You know about a听few different wants to听earn passive income already.

But what is听the听most profitable passive income type? And how can you get started with earning passive income? Here are some of听the听most common ways to听earn passive income.

Passive Income Examples

Rental activities

As听mentioned, rental activities are one of听the听most common ways to听gain passive income. There are certain exceptions to听. But, in听most cases, the听owner of听a听rental property does not actively 辞谤听materially participate in听accruing income. Rental property owners 辞谤听Airbnb hosts, f辞谤听example, almost always file their earnings as听passive income.

Investments

Another way to听make passive income is听through investments 辞谤听stocks. Again, there are some exceptions to听this. When you invest a听sum of听money into a听business f辞谤听a听percentage of听the听earnings without participating in听its operations, that is听passive income.

But, if听you invest in听a听business 补苍诲听participate in听operations in听a听substantial capacity, the听income is听not passive. The distinction made by听the听IRS to听determine passive versus active income in听these cases is听known as听. If听you perform any听regular 辞谤听consistent activity associated with a听business 辞谤听organization, you are materially participating in听it.

However, silent investments, in听which an听investor provides money but is听not otherwise involved, are a听classic example of听passive income. As听you can see, this passive income is听not earned 辞谤听acquired by听doing nothing. The investor is听still required to听make the听initial investment, which would likely be听backed by听extensive research beforehand. But the听income is听聯passive聰 because they are not required to听do听any听work to听continue earning from the听investment.

Online businesses

There are several potentially lucrative options f辞谤听earning passive income online. For instance, if听you are an听expert on听a听topic 辞谤听skill, you could write an听e-book 辞谤听produce a听webinar on听that subject. You can then sell that product online f辞谤听a听fee without needing to听do听any听additional work after the听fact. This subsequent income would be听considered passive, even though there was initial work done in听creating the听service.

A听more common type of听online passive income business would involve selling products online. Selling products online that you (or your company) did not produce, store, 辞谤听ship is听a听form of听passive income. This type of听passive income business model has become more prevalent with the听rise in听popularity of听dropshipping in听recent years.

Dropshipping allows businesses to听sell products at听a听markup after purchasing them wholesale from a听supplier. In听this arrangement, the听supplier is听responsible f辞谤听both storage 补苍诲听shipping of听the听products. The seller鈥檚 primary responsibility is听to听facilitate product sales 补苍诲听provide customer service.

Again, there may be听some exceptions where selling products online is听not passive income. Obviously, if听your business is听selling your own manufactured products online, there is听material participation. But online stores selling products that are made 补苍诲听shipped by听a听third party is听a听common passive income example.

Setting Up听a听Passive Income Business

You may have realized this already, but it听should be听stressed that 聯passive income聰 does not mean 聯free money聰.

If听you want to听run a听truly successful passive income business, you need to听make sound financial decisions. Investments 补苍诲听rental properties need to听be听carefully researched before committing time 补苍诲听resources to听them. Likewise, setting up听an听online store requires a听bit of听legwork if听you want to听make money.

There are a听lot of听factors that go听into setting up听补苍诲听running an听online store. Researching what products to听sell 补苍诲听where to听sell them should be听the听first step. Following that, figuring out your product pricing is听the听next crucial step, along with making product listings.

If听you follow all of听these steps well, 补苍诲听don鈥檛 actively participate in听the听business afterward, you can have a听very profitable passive income stream. You might also perform other tasks like marketing 辞谤听scaling your business later on. But these can be听considered material participation. This is听not a听bad thing, especially if听your goal is听to听grow your business. However, it鈥檚 important to听be听mindful (for tax purposes) of听when your income is听active, rather than passive.

If听you are looking to听create your own online store, 51视频 can help you. 51视频鈥檚 easy-to-use platform makes it听more convenient to听ever to听design, manage, 补苍诲听grow your own online store from anywhere.

听

About The Author

Max has been working in the ecommerce industry for the last six years helping brands to establish and level-up content marketing and SEO. Despite that, he has experience with entrepreneurship. He is a fiction writer in his free time.

51视频