The amount of tax you will pay on passive income will largely depend on the amount of income you generated and the ways in which it was obtained. For example, income from interest or short-term capital gains will be taxed according to standard income tax rates, while qualified dividends will be taxed according to long-term capital gains rates if you made more than $38,600 in ordinary income.
Another great aspect of passive income is that it is often completely scalable. Consider my book. If I sell 10 copies of it, I might get $100. If I sell 100 copies of it, I might get $1000. How much additional work did it take for me to sell those extra 90 books? Zero. And there’s nothing keeping me from selling 1,000 or even 10,000 copies of the book. A website is the same way. No limit on the eyeballs that can view it (as long as I keep upgrading the hosting plan!) Shares of stock are the same way. Owning 100,000 shares is no more work than owning 10 shares. If you’re a real estate investor, once you get your “system” in place (agent, insurance guy, attorney, accountant, property manager, repairman etc) it may not take you much more work at all to own ten properties than to own one. Maybe you do speaking gigs and charge $50 a head. Is it any more work to speak to 500 instead of 50? Not really. Leveraging your money is great, but leveraging your time through scalability is even better.
As a matter of background, Finance wanted to address the alleged tax loophole benefit of using a CCPC for retaining income to simply build investment portfolios not used in the business. To illustrate this benefit, let’s assume that Ms. Shareholder owns all the shares of a CCPC. That CCPC employs a large group to manage real estate property and earns $100 of what the tax law perceives as active income. The earnings for the corporation would be subject to a combined federal and Quebec income tax rate of 26.7% (assuming the small business deduction is not applicable in this instance). If in place of the CCPC, the same individual hired employees herself, the $100 of active income she would earn would be subject to a combined federal and Quebec personal top marginal rate of 53.53%. This difference in tax rates provides the corporation with approximately $26.83 of tax deferral than that earned by the individual.
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.
For those of you who don’t want to come up with a $220,000 downpayment and a $900,000 mortgage to buy the median home in SF or NYC, who don’t want to deal with tenants or remodeling, and who wants to not do any work after the investment is made, check out Fundrise. They are my favorite real estate crowdsourcing company founded in 2012 and based in Washington DC. They are pioneers in the eREIT product offering and they’re raising an Opportunity Fund to take advantage of new tax favorable laws.
If the total is more than 500, don’t complete Worksheet A or B. None of the activities are passive activities because you satisfy test 4 for material participation. (See Material participation tests , earlier.) Report all the income and losses from these activities on the forms and schedules you normally use. Don’t include the income and losses on Form 8582.
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Real-estate crowdfunding ($9,600 a year): Once I sold my SF rental, it was natural to reinvest some of the proceeds into real-estate crowdfunding to keep sector exposure. I didn't invest a lot in some of my favorite real-estate investment trusts because I felt a rising interest-rate environment would be a stronger headwind for REITs. But if I could be more surgical with my real-estate investments by identifying specific investments in stronger employment-growth markets, I thought I could do better.
Finance was concerned that notwithstanding protective provisions in the law to safe guard against this tax deferral, professionals and other groups were using corporations exclusively for the purposes of gaining this benefit. This platform of concern for politically correct fairness and equity however did not address the fact that the after-tax profits of a corporation distributed to the individual are subject to a second layer of tax when the individual is paid a dividend from the company. As such, when Ms. Shareholder ultimately receives a dividend from the CCPC of its retained earnings, she will have paid a combined corporate and personal tax of approximately 56%, which is about 3 points higher than the top marginal rate applicable to individuals. The objective of the second layer of tax is to achieve what historically was called the principle of integration.
During 2017, John was unmarried and wasn’t a real estate professional. For 2017, he had $120,000 in salary and a $31,000 loss from his rental real estate activities in which he actively participated. His modified adjusted gross income is $120,000. When he files his 2017 return, he can deduct only $15,000 of his passive activity loss. He must carry over the remaining $16,000 passive activity loss to 2018. He figures his deduction and carryover as follows.
The main idea behind the new passive income rules is to create a system that taxes businesses proportionally to their overall size and income amount. If you’re mostly dealing with smaller startups and family-run businesses, these new passive income rules will probably have little effect, and may even allow companies more freedom to grow their business.
Employees and self-employed people have to pay federal income tax on earnings related to work, but the government also imposes income tax on various sources of passive income. Passive income or unearned income describes income that does not require active work, such as interest credited to savings accounts and investment income. The federal income tax rate on unearned income varies from one type of passive income to another. Note that the tax rate for passive income will differ for the 2018 tax year, as the new tax bill signed in December, 2017 changes some of these provisions.
​Network marketing, or multi-level marketing, seems to be on the rise. Companies such as Young Living Oils, Avon, Pampered Chef, and AdvoCare are all multi-level marketing companies. You can earn passive income through network marketing by building a team underneath you (often referred to as a down line.) Once you have a large team you can earn commissions off of their sales without having to do much.
Investing is arguably the easiest way to make passive income.  The problem is most investments sound good in theory but don’t work out so well in practice.  And if you don’t have much experience or access to capital, let alone the time to work it all out, it can seem more or less impossible.  However, there is one smart way to invest that just might work.  Continue reading >
I guess I just don’t understand why the specific importance of focusing on “dividends” instead of focusing on the total return of your investment, including stock appreciation. I don’t really care if a company decides to issue a dividend or not; presumably, if they don’t issue a dividend, then they’re doing other things to increase the value of the company, which will be reflected in the stock price of the company. As an investor, I can make money by selling a percentage of my holdings or collecting dividends, and I don’t really care how that’s divided up – it’s an artificial distinction.
Are you totally convinced that I have completely diverged from talking about active vs. passive income? I don’t blame you. I would have forgotten about those by now too. But let’s bring them back now. Ok, how do those relate to lifestyle design? Well, I’m assuming we have established that your personal lifestyle design does not involve working, correct? Do you remember which kind of income requires you to work for it? Active income. So then for complete lifestyle design, do you want to have to rely on any active income? No. You only want passive income because passive income doesn’t require much, if any, work on your part. Then you are free to travel or play or watch TV all you want.
Although YouTube has been around for years, it is gaining in popularity as more people “cut the cord” on their cable TV service. There are plenty of people who are polished and have production quality that rivals many of the movies or TV shows that I watch. However, the vast majority are people just like you and me. Don’t be shy. Trust me, no matter what kind of content you publish, there are people way worse. And you will get better, just give it time.
This is a very passive way of generating income, but the catch is that you need a lot of money to build this passive income machine.  For example, you find a combination of dividend producing stocks & bonds (this also can be done with CD’s (and other cash equivalents) that you are comfortable with, the yield (or passive income) generated on the portfolio is 5%.  In order to generate $50,000 a year in passive (dividend) income you would need $1,000,000 in your account.  (CDs are FDIC insured up to $250,000 per depositor per insured depository institution.)
CreateSpace Independent Publishing Platform makes beautiful passive incomes with classic and higher-grade materials. You do nt need anything special in order to set up a successful passive income stream, you just need to commit yourself to the process and see the process through to completion. The passive income is important to stay the course, however, and to keep in mind that the ends are certainly going to justify the means. With 4.3 rating and more than 200 buyers, the CreateSpace Independent Publishing Platform top 10 passive incomes stands as the best choice.
Passive income is earnings derived from a rental property, limited partnership or other enterprise in which a person is not actively involved. As with active income, passive income is usually taxable. However, it is often treated differently by the Internal Revenue Service (IRS). Portfolio income is considered passive income by some analysts, so dividends and interest would therefore be considered passive.
Under the new rules, the active income a business is allowed to claim at the small business amount is tied to the business’ passive income. Businesses with less than $50,000 in annual passive income can claim the full $500,000 at the 9% small business rate. The amount eligible for the small business rate shrinks by $5 for every $1 over $50,000 that a business makes in passive income, until it eventually reaches zero.

Case Schiller only tracks price appreciation of RE. RE as rental investment vehicle is measured primarily on rental yield or cap rate or some other measure. Price appreciation in that scenario is only a secondary means of growth, and arguably should be ignored as a predictor of returns when deciding on whether or not to invest in rentals. More important key performance indicators for rentals are net operating income and cash ROI. Appreciation, if it occurs, is a bonus.
Get Paid To Shop: The Shopkick app is a free mobile app that pays you walk into stores, link your credit card, scan barcodes in stores, shop online, refer friends and more. Convert points into gift cards and other cash prizes. This app makes shopping fun, and you even get a 250-point bonus when you sign-up as a new member. The best part? It's 100% FREE to join.
​Affiliate marketing is the practice of partnering with a company (becoming their affiliate) to receive a commission on a product. This method of generating income works the best for those with blogs and websites. Even then, it takes a long time to build up before it becomes passive. If you want to get started with affiliate marketing check out this great list of affiliate marketing programs.
Kate, a single taxpayer, has $70,000 in wages, $15,000 income from a limited partnership, a $26,000 loss from rental real estate activities in which she actively participated, and isn’t subject to the modified adjusted gross income phaseout rule. She can use $15,000 of her $26,000 loss to offset her $15,000 passive income from the partnership. She actively participated in her rental real estate activities, so she can use the remaining $11,000 rental real estate loss to offset $11,000 of her nonpassive income (wages).

Any passive activity losses (but not credits) that haven’t been allowed (including current year losses) generally are allowed in full in the tax year you dispose of your entire interest in the passive (or former passive) activity. However, for the losses to be allowed, you must dispose of your entire interest in the activity in a transaction in which all realized gain or loss is recognized. Also, the person acquiring the interest from you must not be related to you.


In general, the purpose of the passive activity rules is to prevent taxpayers from improperly claiming immediate tax losses on investments. Instead, the IRS wants to limit loss deductions to those businesses where taxpayers were integrally involved with the operation or management of the business. In conjunction with other rules that limit losses to the amount of money that an investor puts at risk, the end result of the passive activity rules is to encourage taxpayers to engage in profitable passive activities in order to wipe out any passive activity losses they might incur.
Consider withdrawing sufficient corporate funds to maximize your RRSP and TFSA contributions, rather than leaving the funds inside the corporation for investment. Given sufficient time, RRSP and TFSA investing would generally outperform corporate investing when earnings come from interest, eligible dividends, annual capital gains, or a balanced portfolio. And removing funds that would otherwise be invested within the corporation could reduce future AAII.
Additionally, if you wrote a book and receive royalty checks, that income is also passive and not subjected to self-employment taxes. But, if you write several books or make updates to an existing book (like this one) then you are materially participating in your activity and your income is earned income. And Yes, you would pay self-employment taxes on that income.
I guess I just don’t understand why the specific importance of focusing on “dividends” instead of focusing on the total return of your investment, including stock appreciation. I don’t really care if a company decides to issue a dividend or not; presumably, if they don’t issue a dividend, then they’re doing other things to increase the value of the company, which will be reflected in the stock price of the company. As an investor, I can make money by selling a percentage of my holdings or collecting dividends, and I don’t really care how that’s divided up – it’s an artificial distinction.
During 2017, John was unmarried and wasn’t a real estate professional. For 2017, he had $120,000 in salary and a $31,000 loss from his rental real estate activities in which he actively participated. His modified adjusted gross income is $120,000. When he files his 2017 return, he can deduct only $15,000 of his passive activity loss. He must carry over the remaining $16,000 passive activity loss to 2018. He figures his deduction and carryover as follows.

Let’s take a look at a smaller and more niche category for the sake of our discussion. We’ll look at “Food & Drink” on the iOS app store. Less big companies and less noise in these smaller categories. You can see the top grossing app is eMeals. A meal planning and grocery shopping list app. Number 5 is another meal planning app. Even has the same green icon. See a trend here? You’ll also see that 16 out of the top 24 grossing apps are “freemium” apps. Meaning, their business model is to give an app away for free and up-sell upgrades.
My returns are based on full cash purchase of the properties, as it is hard to compare the attractiveness of properties at different price ranges when only calculating down payment or properties that need very little rehab/updates. I did think about the scores assigned to each factor, but I believe tax deductions are a SIGNIFICANT factor when comparing passive income steams.
Great post. Fortunately I learned pretty early on that our whole tax system is set up to provide greater advantages to those earning passive income. Meanwhile, the majority of the workers in the country continue to trade their precious time for a paycheck, and then get screwed through additional taxation on that money. I’m still working a 9-5, but my passive income grows with every month and I’m always looking to build more streams of passive income. You never know when one of those little streams will turn into a raging river and start really providing massive amounts of cash!
A Risk Score of 10 means no risk. A Return Score of 1 means the returns are horrible compared to the risk-free rate. A Feasibility score of 10 means everybody can do it. A Liquidity Score of 1 means it’s very difficult to withdraw your money without a massive penalty. An Activity Score of 10 means you can kick back and do nothing to earn income. To make the ranking as realistic as possible, every score is relative to each other. Furthermore, the return criteria is based off trying to generate $10,000 a year in passive income.
This is simple. Do your research and choose a paid price point. Once your app is released you can tweak your pricing to find the optimal value. From personal experience, I’ve noticed I generally make more money when choosing to go the premium route vs the budget route. Meaning, I price the app higher than my competitors to let them know they are purchasing a more premium product. Of course, this is not always the case. Sometimes the $0.99 apps do better since they generate more downloads and climb the app rankings easier. Higher app ranking means more visibility.

Even if each patron only contributes a very small amount each month, it can still be a huge source of income. Take a look at the Patreon page for Kinda Funny, an internet video company. They have over 6,209 patrons which means an average of just $3 a month would be a monthly income of almost $19,000 – plus they get cheerleaders that are always happy to spread the word on their brand.


The average period of customer use of the property, as figured in (1) above, is 30 days or less and you provide significant personal services with the rentals. Significant personal services include only services performed by individuals. To determine if personal services are significant, all relevant facts and circumstances are taken into consideration, including the frequency of the services, the type and amount of labor required to perform the services, and the value of the services relative to the amount charged for use of the property. Significant personal services don’t include the following.
It is common for a business owner who relies on machinery or equipment to have two business entities. One entity is an LLC that owns the assets. The other entity is an S corporation which leases the assets from the LLC to use in the business. This directly reduces the S Corp’s income, and might possibly reduce the amount of salary required to be paid by the business to the shareholders. Good news.

Self-publishing belongs firmly at the top of any passive income ideas list. Amazon, with Kindle Direct Publishing (electronic version) and CreateSpace (print on demand version) dominates the self-publishing world. It’s both good and bad. Good in that they’re quite generous with their commission rates (usually 70%). Bad in that they can change their policies at any time to be less favourable for authors and there is nowhere else for us to go. That’s not entirely true. There are a few other options, but none of them are as good as Amazon!


When a taxpayer records a loss on a passive activity, only passive activity profits can have their deductions offset instead of the income as a whole. It would be considered prudent for a person to ensure all the passive activities were classified that way so they can make the most of the tax deduction. These deductions are allocated for the next tax year and are applied in a reasonable manner that takes into account the next year's earnings or losses.

Fulfillment by Amazon (FBA) is another model that has been gaining popularity in recent months. The major difference from the model that I described above is that instead of shipping it to a warehouse, you ship it directly to Amazon. For a cut of the money on each sale (and they also charge storage costs), they package it all up and send out your order. You make less money than doing it yourself, however once set up, it does have the hands-off factor going for it.
The organizing principle behind this grouping, appropriate economic units, is relatively simple: if the activities are located in the same geographic area; if the activities have similarities in the types of business; or if the activities are somehow interdependent, for instance, if they have the same customers, employees or use a single set of books for accounting.
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