Earlier this year, the government passed new tax legislation governing Canadian-controlled private corporations (CCPCs), including incorporated professionals. As we enter the final weeks of 2018, one new measure is of particular concern — the potential looming loss of the small business deduction (SBD) in 2019 for corporations with more than $50,000 of passive investment income in 2018.
All ideas take some amount of time and money to come to fruition. Some people have a lot of one of these, but not much of the other. A lot of successful ideas have started when one person had the resources that another did not. And many businesses have been started using 0% loans from credit cards to fund their concept and keep the business going until it achieved success.
When money is lent to a partnership or S-corporation acting as a pass-through entity (essentially a business that is designed to reduce the effects of double taxation) by that entity’s owner, the interest income on that loan to the portfolio income can qualify as passive income. As the IRS language reads: "Certain self-charged interest income or deductions may be treated as passive activity gross income or passive activity deductions if the loan proceeds are used in a passive activity."
The average period of customer use of the property is 7 days or less. You figure the average period of customer use by dividing the total number of days in all rental periods by the number of rentals during the tax year. If the activity involves renting more than one class of property, multiply the average period of customer use of each class by a fraction. The numerator of the fraction is the gross rental income from that class of property and the denominator is the activity's total gross rental income. The activity's average period of customer use will equal the sum of the amounts for each class.
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Qualified dividends are taxed the same as long-term capital gains. In 2018, you can earn up to $38,600 in ordinary income without being taxed on long-term capital gains or qualified dividends. If you earn between $38,600 and $425,800 in ordinary income, your long-term capital gains tax rate is 15 percent, which would also apply to qualified dividends. If you make more than $425,800, the rate is 20 percent.
If the property in the syndication was held for at least a year, the gain will be treated as long term capital gain subject to 15%/20% capital gains rate. Any depreciation taken on the property is subject to recapture and taxed at 25%. The issuance of a K-1 usually results in a taxpayer needing to extend their individual tax return as most K-1s are not sent out until after the regular due date April 15.
The IRS requires REITs to pay out at least 90% of its income to shareholders. Thus, REITs tend to be higher yield since a large fraction of the earnings come out as dividends, which may be beneficial for certain income oriented investors. The flipside is the tax cost for investing in REITs since income must be distributed and as a holder the taxes flow through to you.
Having an extra house, condo or apartment is potentially quite lucrative, especially if what the tenant pays covers your mortgage, taxes, insurance, etc. Someone else is basically building your pool of wealth because in 10 or 20 years, you’ll have this $100,000+ asset that is paid off. You can sell it for a large chunk of cash, or keep renting it out and have a nice, steady stream of income. The major problem is that managing this isn’t exactly passive, unless you hire a rental management company who generally take one month’s rent out of the year in exchange for doing this.
The K-1 stated that the income was from a trade or business and included self-employment tax. Dr. Hardy's ownership interest in MBJ was not grouped with his medical practice activity, and the grouping regulations were not considered. In 2008, their CPA determined that the income from MBJ was passive and started to report it accordingly. He determined this because he learned that Dr. Hardy was not involved in any management of MBJ and was not liable for the debts of the company. He did not amend the 2006 and 2007 returns because he believed the difference was immaterial. In 2008 through 2010 the Hardy’s reported the MBJ income as passive and claimed an allowed loss.
According to Derek Wagar, a Tax Partner at Fuller Landau LLP in Toronto, if an investor is considering selling certain investments at a profit in the near future, it may make sense to trigger those gains gradually over several years (to the extent possible) as the new passive income rules come into effect in 2019 (based on 2018 passive income). Spreading out gains across tax years may allow your CCPC to preserve more of its SBD limit in future years.
I've now only got an SF rental condo and a Lake Tahoe vacation rental in my real-estate-rental portfolio. Although I miss my old house, I certainly don't miss paying $23,000 a year in property taxes and another mortgage, and dealing with leaks and managing terrible tenants. I drove by the other day and couldn't believe how much noisier and busier the street was than where I currently live. I wouldn't be comfortable raising my son there.
But, if you’re serious about making money online and generating some passive income for yourself, keep reading for some ideas on how to do that. It is possible, but it does take some serious effort and knowledge. The good news is that starting is the most important thing and you can learn all you need to as you stumble along. I started from ground zero 1.5 years ago and now I earn around $1000/month in passive income.
What I find most interesting is the fact that I had never considered options like LendingTree or realityshares for other income sources. Investing in property has been too much of bad luck for people that I know personally, so I am interesting in getting involved in a situation where I would have to be dealing with maintenance issues or tenants. There are services for you to do that, but I had not come across any that didn’t eat most if not all of the earnings. Then again, I live in the NY area. Investing in the midwest would not be reasonably possible for me, directly, but reading about realityshares is something I am going to look into further. That might be a real possibility.
As interest rates have been going down over the past 30 years, bond prices have continued to go up. With the 10-year yield (risk free rate) at roughly 2.55%, and the Fed Funds rate at 1.5% (two more 0.25% hikes are expected in 2018), it’s hard to see interest rates declining much further. That said, long term interest rates can stay low for a long time. Just look at Japanese interest rates, which are negative (inflation is higher than nominal interest rate).
However, this comes back to the old discussion of pain versus pleasure. We will always do more to avoid pain than we will to gain pleasure. When our backs are against the wall, we act. When they're not, we relax. The truth is that the pain-versus-pleasure paradigm only operates in the short term. We'll only avoid pain in the here and now. Often not in the long term.
If you make the choice, it is binding for the tax year you make it and for any later year that you are a real estate professional. This is true even if you aren’t a real estate professional in any intervening year. (For that year, the exception for real estate professionals won’t apply in determining whether your activity is subject to the passive activity rules.)
If all or any part of your loss from an activity is disallowed under Allocation of disallowed passive activity loss among activities for the tax year, a ratable portion of each of your passive activity deductions (defined later), other than an excluded deduction (defined below) from such activity is disallowed. The ratable portion of a passive activity deduction is the amount of the disallowed portion of the loss from the activity for the tax year multiplied by the fraction obtained by dividing:
Who doesn’t like some down and dirty affiliate fees?! Especially if you realize it can be even easier to make money this way than with an ebook. After all, you simply need to concentrate on pumping out some content for your own site and getting the traffic in, often via Google or social media. Unsurprisingly, most people can enjoy their first affiliate sale within 30 days of starting a blog. Continue reading >
Let’s say a company earns $1 a share and pays out 75 cents in the form of a dividend. That’s a 75% dividend payout ratio. Let’s say the next year the company earns $2 a share and pays out $1 in the form of dividends. Although the dividend payout ratio declines to 50%, due the company wanting to spend more CAPEX on expansion, at least the absolute dividend amount increases.
There are a couple of problems with direct investment in real estate though. It’s expensive to buy even a single property, a minimum of tens of thousands of dollars, and there’s no way most investors can build a portfolio of different property types and in different regions to protect from those risks when you have all your money in just one or two investments.
Those who don't meet this test can qualify for a limited $25,000 allowance for losses if they qualify as an active participant. Active participation requires only limited activities, such as approving new tenants, setting rental terms, and approving payouts. If you qualify, you can then take up to that limited amount of loss each year, carrying over any excess losses until you generate rental income to offset it.
If you sell an asset like a stock or mutual fund at a price that is higher than the amount you paid, the difference or profit you realize is a capital gain. Capital gains are divided into two categories: short-term gains and long-term gains. Short-term gains are profits realized from the sale of assets you hold a year or less, while long-term gains are profits gained from selling assets you hold longer than a year.
In order to generate $10,000 in Net Operating Profit After Tax (NOPAT) through a rental property, you must own a $50,000 property with an unheard of 20% net rental yield, a $100,000 property with a rare 10% net rental yield, or a more realistic $200,000 property with a 5% net rental yield. When I say net rental yield, I’m talking about rental income minus all expenses, including a mortgage, operating expenses, insurance, and property taxes.
1. Interest: If the interest a landlord pays on their mortgage isn’t their biggest expense, it is certainly close to it. Even with rates as low as they are today, interest payments are a sizable cost that needs to be accounted for. Nonetheless, for as intimidating as interest payments can be, they are not without their benefits. Mortgage interest has become synonymous with one of the largest deductions landlords can make. Passive income investors can deduct mortgage interest payments on loans used to acquire or improve a rental property. However, it is important to note that they can also deduct the interest paid on credit cards specifically used to to maintain rental property activity.
If any amount of your pro rata share of an S corporation's loss for the tax year is disallowed under the basis limitation, a ratable portion of your pro rata share of each item of deduction or loss of the S corporation is disallowed for the tax year. For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing:
Now, under the regime proposed by the 2018 federal budget, the same corporation would not be eligible for a refund of its RDTOH upon the payment of the Eligible Dividend. Instead, the corporation will obtain its RDTOH back only if the dividend paid is a dividend other than an Eligible Dividend. This will therefore eliminate the deferral of the additional 4% income tax.
In determining whether qualified nonrecourse financing is secured only by real property used in the activity of holding real property, disregard property that’s incidental to the activity of holding real property. Also disregard other property if the total gross fair market value of that property is less than 10% of the total gross fair market value of all the property securing the financing.
Keep in mind, many questions can be answered on IRS.gov without visiting an IRS Tax Assistance Center (TAC). Go to IRS.gov/LetUsHelp for the topics people ask about most. If you still need help, IRS TACs provide tax help when a tax issue can’t be handled online or by phone. All TACs now provide service by appointment so you’ll know in advance that you can get the service you need without long wait times. Before you visit, go to IRS.gov/TACLocator to find the nearest TAC, check hours, available services, and appointment options. Or, on the IRS2Go app, under the Stay Connected tab, choose the Contact Us option and click on “Local Offices.”
But how exactly can you generate passive income? Some methods for earning passive income require very little work on your part. Investing, whether in the stock market or with a bank, is the best way to make your money grow with very little ongoing effort. It just takes a different type of discipline – the discipline to spend less than you make and resist investment decisions based on emotions.
Or you could do joint ventures/strategic alliances for your business or for other businesses and make residual cash flow for $0 investment.. that’s what I do lol. No money, no risk, little time, 20+ years working from home. Just connect companies and take a %, use the Internet to do it locally or globally, be the intermediary & connect companies…. ;-)
The following post is a guest post from Anjali Jariwala, Founder of FIT Advisors. I began receiving a good number of questions about the tax implications of some of the different types of real estate investments I was making. Instead of fumbling with it myself, I invited an expert in the field of finances and tax to help me with it. Some of it is quite technical but I told her I’m a fan of numbers. Enjoy!)
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Great breakout of some common items that are (mostly) accessible to individuals. My biggest issue with p2p is the ordinary interest it generates and the ordinary tax that we have to pay. That really takes a bite out of the returns. Fortunately, I opened an IRA with one of the providers to juice the return with zero additional risk. 6-8% nominal returns over a long period of time will make me very happy. It should end up as 5-7% of the portfolio anyway, so nothing too significant.
I have only dabbled in drop-shipping before when I had an eCommerce platform 6 years ago or so. I think it is something that you could do on the side, but you would want to do in depth research on the industry you want to get into before setting up shop. It may be a little less passive up front, but over time you could take your hands off the wheel.