Passive activity income often gets very different tax treatment from the ordinary income that people have. In particular, passive losses are typically deductible only against passive income, and you're not able to claim excess passive losses immediately, instead having to carry them forward. It's therefore vital to understand the tax rules surrounding passive activity income in order to assess investments in passive activities correctly.
YouTube is one of the most rapidly growing trends in 2018 and getting subscribers on YouTube is all the rage. You can create videos on any theme like opinions, comedy, love, tutorials, music etc. and put them on YouTube. Overlaying your video with Google AdSense will make you earn every time the ad is clicked. If you create YouTube videos for an education matter, you can repurpose these videos into an online course.
You don’t have to be a big corporate executive to need an assistant. Filing, emailing, scheduling and organizing the results of your moneymaking ventures takes time. And that's time you don’t want to waste while building your passive income empire. Nor do you want to expend any more time and money training and paying a new employee than you need to. Instead, consider hiring a virtual assistant.
This is an overly simplified example and leaves out depreciation, etc., but you get the idea. In addition, we used a 40% salary calculation which might be different in your situation. Regardless, the apples to apples comparison shows a nice little savings of $1,692. As mentioned in a previous chapter, the arrangement also allows you to have different partners in each entity allowing you to expand ownership in the operating entity while retaining full ownership in the leased asset (building).
There was a time when CDs would produce a respectable 4%+ yield. Nowadays, you’ll be lucky to find a 5-7 year CD that provides anything above 2.5% The great thing about CDs is that there are no income or net worth minimums to invest, unlike many alternative investments, which require investors to be accredited. Anybody can go to their local bank and open up a CD of their desired duration. Furthermore, a CD is FDIC insured for up to $250,000 per individual, and $500,000 per joint account.
The appeal of these passive income sources is that you can diversify across many small investments, rather than in a handful of large ones. When you invest directly in real estate, you have to commit a lot of capital to individual projects. When you invest in these crowdfunded investments, you can spread your money across many uncorrelated real estate ventures so individual investments don't cause significant issues.
If you’re a retired or disabled farmer, you’re treated as materially participating in a farming activity if you materially participated for 5 or more of the 8 years before your retirement or disability. Similarly, if you’re a surviving spouse of a farmer, you’re treated as materially participating in a farming activity if the real property used in the activity meets the estate tax rules for special valuation of farm property passed from a qualifying decedent, and you actively manage the farm.

Overall, generating passive income mostly provides benefits. First and foremost, you’re able to make money without using too much of your time. Of course the time you actually spend will depend on your passive income venture, as will the amount of money you put into it. The key is to find the right balance for your existing lifestyle so that you turn a profit without too much spent.
When I did her recent tax return she had $45,000 in passive losses from the rentals and $35,000 in income from her S-Corporation. I called her and found out how many hours she had only worked for three months in her S-Corp, which was less than 500/750 hours per year.  I changed the nature of the income from the S-Corporation to passive, thereby eating up the passive losses from the rental. 

You can offset deductions from passive activities of a PTP only against income or gain from passive activities of the same PTP. Likewise, you can offset credits from passive activities of a PTP only against the tax on the net passive income from the same PTP. This separate treatment rule also applies to a regulated investment company holding an interest in a PTP for the items attributable to that interest.
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.

In expensive cities like San Francisco and New York City, net rental yields can fall as low as 2%. This is a sign that there is a lot of liquidity buying property for property appreciation, and not so much for income generation. This is a riskier proposition than buying property based on rental income. In inexpensive cities, such as those in the Midwest, net rental yields can easily be in the range of 8% – 12%, although appreciation may be slower.
2. Focus on income-producing assets. Internet growth stocks may be sexy, but they provide no income. To build a large enough passive-income stream to survive, you must invest in dividend-generating stocks, certificates of deposit, municipal bonds, government Treasury bonds, corporate bonds, and real estate. You're free to invest in non-income-producing assets for capital appreciation too. You just want to earn reliable income when the day comes to leave your job.

While reading a very interesting book recently about the conquest of the Northwestern Territory (it’s Ohio, not Oregon for those of you who aren’t history buffs) I realized that the founding fathers of the US were all unabashed capitalists. Washington, Hamilton etc all held title to huge tracts of land West of the Appalachians that they had been speculating in for decades. Forming the US Army (a standing army was a big deal to a people who at the time equated a standing army with tyranny) and conquering the Iroquois was, in at least some respects, about profiting on their investments. While WCI readers probably don’t have any plans to conquer other nations, the real point of all this financial stuff we talk about on this blog is to turn yourself into a capitalist as quickly as possible. While capitalism has its issues, it’s still the best economic system we’ve found yet.

How to Monetize: Affiliate marketing works well when you discuss products on your blog. For our fish tank blog, we would link to all the things you need to buy for an aquarium and then when people click on that link and buy that item (and other items they purchase with it with some exceptions) you get a percentage of the purchase. Amazon Associates is the best-known affiliate marketing program, but there are others like Impact Radius, ShareASale, Commission Junction, ClickBank and Rakuten too.


If you are too risk-averse to engage in stock trading, there’s a much safer option to earn passive income, albeit with much lower margins of return: certificates of deposit or fixed deposits issued by banks. These financial vehicles are similar to mini investments. CDs work very similar to savings accounts with one notable difference. Once you place a deposit, it cannot be withdrawn until the certificate matures. You can obtain these certificates for lump sums of cash that you can allow to mature within time periods like 2 years or 5 years. The advantage of CDs is that they offer higher interest rates than regular savings accounts. You can rest assured that the money will be safe in the bank. A CD earns interest quarterly or annually and all you have to do is just sit back and wait for it to mature.
You’re at risk for amounts borrowed to use in the activity if you’re personally liable for repayment. You’re also at risk if the amounts borrowed are secured by property other than property used in the activity. In this case, the amount considered at risk is the net fair market value of your interest in the pledged property. The net fair market value of property is its fair market value (determined on the date the property is pledged) less any prior (or superior) claims to which it’s subject. However, no property will be taken into account as security if it’s directly or indirectly financed by debt that’s secured by property you contributed to the activity.
Finding an outstanding development team is critical for success. Don’t just go for the lowest and cheapest price. You need a balance of budget and quality. From personal experience, I’ve had the best luck with developers from Romania. That is my number one pick. When you post a job on Upwork.com, everyone will be promising you world. Do not fall for a development team that does not have good feedback and return clients. Return clients are one of the most important. This means their client was willing to return to them for more work after their job finished! That says something.

​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.
You need to decide which machines you want to run, get the necessary licenses to operate them (you're selling items so you need to get sales licenses and whatnot from your state), buy the machines and a truck for the items in the machines, find a supplier of the products, and then finally you can secure locations. Finally, you need to service them periodically or hire someone to service them.

Flynn has created many different products. While his LEED exam is what got him started, he has both earned a commission from selling other people’s products and offered a commission to others who would sell his wares, and also recently created his first software, SmartPodcastPlayer.com, after realizing that most online podcast players offered only the basic stop/start/volume features. He hired a development team to create a superior one, which was a success from day 1. “We sold out 250 beta licenses in less than 24 hours, because I was addressing a need but also, I had built up an audience and trust with them … When you build that amount of trust with your audience, whatever you come out with, they will love.”
“There is no such thing as 100% passive income,” says Flynn. “Even with real estate you still have to manage your properties, or even with the stock market, which is potentially passive income, you still have to manage your portfolio. With online business, there is no such thing as 100% passive income — and this is coming from a guy with a blog called SmartPassiveIncome.com. The definition of passive income is ‘building these businesses of automation,’ but in order to keep them automated and keep that trust going with your audience on top of that, you do have to keep it up every once in a while — so a lot of time upfront and a little time after. But there is alway time involved.”
As you may have noticed, there is a common theme throughout all the ways the wealthy generate passive income.  All of them require you, in the beginning, to trade your time for money while building your passive income machine.  Eventually you will be able to leverage that time into exponential passive income while being able to work less and less.  The attitude being a willingness to take some risk, work hard, and create something of value.  If you put good in, you will get good out.  Wealthy people tend to choose this attitude more than others.

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!)
It’s a (mostly) short term, higher risk, higher reward place to invest cash that has a low correlation with the stock market, but is far more passive than buying and managing properties, has more opportunity for diversification than private placements (minimums of 5-10K, rather than 100K), and most of the equity offerings (and all of the debt offerings) provide monthly or quarterly incomes. Unlike a REIT, you can choose exactly which projects you wish to invest in.
One of the most important assets you have is your credit score. By taking care of it and pursuing the steps to improve your credit score, a world of opportunity can open up for you. If you need a loan to buy that rental property or some quick funding through a business credit card, a good credit score will help you get approved so you can build passive income.
We have decided to invest in 2 ETFs, a multi asset allocation ETF (Fixed Inc, alts and div paying equities) and a preferred stock ETF. This will cover almost 45 percent of our deficit. We will be extremely diversified, can access the markets at a very low cost and the investments are liquid. On this pool of $, we have no plans to invade principal unless the investment grows by 20 percent, which we think is unlikely given the characteristics of the investments.
Earned income is the money you earn from working. It includes wages, salaries, tips, and net earnings from self-employment income. It also includes union strike benefits and some types of long-term disability benefits. With some types of deferred compensation plans, the payments are also considered a form of earned income. Earned income is taxed differently than unearned income.
“Where a lot of people mess up is they try to build a business or create a product that serves everybody, and by trying to serve everybody, you serve nobody. You have to specialize and niche down and find a market with a pain point that you, based on your experience, based on your education and based on your passion, can help,” he says. Your earnings will directly reflect how well you serve that particular audience, and the more your message resonates with them, the more opportunities you’ll have to sell to them.
Generally, any gain or loss on the disposition of a partnership interest must be allocated to each trade or business, rental, or investment activity in which the partnership owns an interest. If you dispose of your entire interest in a partnership, the passive activity losses from the partnership that haven’t been allowed generally are allowed in full. They also will be allowed if the partnership (other than a PTP) disposes of all the property used in that passive activity.
However, equipment leasing doesn’t include the leasing of master sound recordings and similar contractual arrangements for tangible or intangible assets associated with literary, artistic, or musical properties, such as books, lithographs of artwork, or musical tapes. A closely held corporation can’t exclude these leasing activities from the at-risk rules nor count them as equipment leasing for the gross receipts test.
There is a way to find undervalued dividend growth stocks. Of course, any additional passive income I receive I will invest into the best dividend growth companies to ensure I’m participating in compound interest. In addition, if you love investing in impact sectors. I like Wunder Capital to invest in solar projects across the U.S. Check out our review on the Wunder Capital platform.
I love real estate investing, but it requires a lot of upfront capital plus you are going to have to learn to love your tenants (see point 6 below)! Crowdfunded real estate investing gives you a way to still invest in the real estate market, without having to necessarily put in a lot of money upfront. It’s definitely a much more passive investment than owning a flat or a house!
Hi Logan, thanks for perfect article on passive income theme! I am a newbie in this passive income thing but everything I read here seems obvious to me. Why not create a passive income, right? So I started googling about making passive income via internet because I like things connected to the web and I think that this will be a huge thing (it already is) and I found this article which seems that is probably very new but in the ebook there are great informations about passive income, at least in my POV (newbie POV). Is this a legit website or can it actually work? I want to expand on that because my 9 – 5 s*cks… Here is the URL: https://cashwithoutjob.online

Passive income broadly refers to money you don't earn from actively engaging in a trade or business. By its broadest definition, passive income would include nearly all investment income, including interest, dividends, and capital gains. What most people are referring to when they talk about passive income is income that comes from what the IRS calls a passive activity.
However, equipment leasing doesn’t include the leasing of master sound recordings and similar contractual arrangements for tangible or intangible assets associated with literary, artistic, or musical properties, such as books, lithographs of artwork, or musical tapes. A closely held corporation can’t exclude these leasing activities from the at-risk rules nor count them as equipment leasing for the gross receipts test.
One of the easiest ways to get exposure to dividend stocks is to buy ETFs like DVY, VYM, and NOBL or index funds. You can also pay an algorithmic advisor like Wealthfront to automatically invest your money for you at a low fee. In the long run, it is very hard to outperform any index, therefore, the key is to pay the lowest fees possible while being invested in the market. Wealthfront charges $0 in fees for the first $15,000 and only 0.25% for any money over $10,000. Invest your idle money cheaply, instead of letting it lose purchasing power due to inflation. The key is to invest regularly.
If you love design and you are an artistic person, selling digital products on Etsy could be a great way to earn passive income. Digital products require little maintenance, your customers will simply receive a link to download them (which means you don’t have to worry about shipping and returns handling). All you need to do is spend time upfront to create beautiful artwork! (Easy right?)
The ideas that follow are not truly “passive income,” in that they require a significant amount of effort. However, I’m defining the term loosely and considering anything where one hour of work does not equal one hour of pay as passive income. The idea is that you put the work in up-front and then reap the benefits down the road. Read on for my top 10 passive income ideas!
 Chase Freedom Unlimited lets you earn a $150 bonus after you spend $500 on purchases in your first 3 months from account opening. You earn unlimited 1.5% cash back on every purchase. There is also a 0% intro APR for 15 months from account opening on purchases and balance transfers, then a variable APR of 16.99-25.74%. The balance transfer fee is 3% of the amount transferred, $5 minimum. The cash back rewards will not expire as long as your card account remains open. There is no annual fee.

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.
This can be a little easier said than done, but if you have a large social media following, you can definitely earn money promoting a product or advertising for a company. You can even combine this with different marketing campaigns if you are an influencer and have your own blog (advertisement + affiliate income). This is how many bloggers make money! Again, it is not 100% passive but once set up correctly and then scaled, can be surprisingly lucrative.
What the best investors do is create a list of simple rules to guide them so that when things get emotional, they remain on-target long term. It’s important to have your focus on the bigger goal. We can’t control all the events in our lives, but we can control what those events mean to us. The purpose of this Unshakeable by Tony Robbins’ summary is to show you that it’s possible to create passive income through financial investments – like index stocks. I hope you enjoy the video review and be sure to drop a like!

Take for example a situation where a CCPC earns rental income from its real estate properties which for this example qualifies as passive investment income and provides, at the same time, property management services that are characterized as active income. Under the current regime, a portion of the high corporate income tax paid by the corporation of 50% on its rental operations is accumulated in its RDTOH and will be refunded by the government only upon the payment of a dividend by the corporation to its individual shareholder. Given that an Eligible Dividend paid out of the property management services are taxed at a lower rate than would be a dividend paid out of the rental income, being a dividend that is not an Eligible Dividend, the company would decide to pay the Eligible Dividend and recover the RDTOH generated from its passive income. The profits generated from the rental operations could be paid to the shareholder the following year or two for example as a dividend that is not an Eligible Dividend, thus providing for a deferral of that additional 4% personal income tax.
The PPACA Medicare tax is a dangerous tax IMHO. It is an entirely new kind of tax. It is small and in jeopardy of going away but I predict it won’t. If it goes away it won’t be for long and it will grow over time – like most taxes. 3.8% is a starting point. This one has the added political appeal of “taxing the rich” and “unearned income” that makes it more palatable to the electorate.

For a closely held corporation, the passive activity loss is the excess of passive activity deductions over the sum of passive activity gross income and net active income. For details on net active income, see the Instructions for Form 8810. For the definition of passive activity gross income, see Passive Activity Income , later. For the definition of passive activity deductions, see Passive Activity Deductions , later.
4. Calculate how much passive income you need. It's important to have a passive-income goal — otherwise, it's very easy to lose motivation. A good goal is to try to generate enough passive income to cover basic living expenses such as food, shelter, transportation, and clothing. If your annual expense number is $30,000, divide that figure by your expected rate of return to see how much capital you need to save. Unfortunately, you've got to then multiply the capital amount by 1.25 to 1.5 to account for taxes.
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.

For a closely held corporation, the passive activity loss is the excess of passive activity deductions over the sum of passive activity gross income and net active income. For details on net active income, see the Instructions for Form 8810. For the definition of passive activity gross income, see Passive Activity Income , later. For the definition of passive activity deductions, see Passive Activity Deductions , later.
I have a total of three CDs left. There is no way in hell I’m selling them after holding them for 4+ years so far to take the penalty. The CDs are for 7 years. That would be completely counterproductive. As a result, I feel very stuck with ever getting my CD money back if I wanted to. If the CDs were for just 1 or 2 years, I agree, it doesn’t matter as much. But combine a 7 year term with 4%+ interest is too painful to give up.

Let’s say I am a parttime real estate investor with buy and hold rentals. I have a normal W-2 job but decided for educational purposes to take/pass the state real estate licensing exam. Now if I have an opportunity and want to work on nights/weekends as a real estate agent, does my passive rental income now get taxed (and much higher) as active income? Or does this come down to whether I work +\- 500 hours as an agent?


This KB article is an excerpt from our book which is available in paperback from Amazon, as an eBook for Kindle and as a PDF from ClickBank. We used to publish with iTunes and Nook, but keeping up with two different formats was brutal. You can cruise through these KB articles, click on the fancy buttons below or visit our webpage which provides more information at-


An affiliate marketer is an online salesperson who promotes products in exchange for a commission. For most of the affiliate programs, you only need to place their banners and links on your site and the system does the rest. However, you will do better if you master sales skill. It’s a vital skill in affiliate marketing. The more you are able to convince people to buy a product that will be of benefit to them, the more you will make money.
“I don’t believe the overnight success exists. There’s a lot of hard work and time involved beforehand,” say Flynn. Angry Birds may have seemed like an overnight success but it was the 52nd game that Rovio created. Flynn says it took him a year or year and a half to build audiences for his most successful sites. (Read these time management expert's tips on the work habits of successful people.)
Income tax is a cost of doing business and that cost carries over into the business of real estate ownership and operations. In July 2017, in the depths of the summer, the Federal Department of Finance (“Finance”) announced drastic changes that would have changed that cost of doing business for those owning shares of a Canadian controlled private corporation (“CCPC”). When ultimately distributed to the individual shareholder in the form of a dividend, investment income earned on the retained earnings generated from an active business would have cost the shareholder an ultimate income tax rate equal to 73% of the investment income. These proposed changes to the “passive income” rules were very complex and would have had the potential to shift the after-tax return for CCPCs while leaving the tax burden of public corporations, foreign corporations and tax-exempt entities unaffected.
Once you start to see some success, don’t be led astray by the money. While Flynn does use affiliate marketing to make money, he only ever recommends products that he has personally used and likes. He is inundated by offers to earn $50 per sale through commission on products he has never even tried. “I’m like, ‘I don’t even know you, I don’t know what this product can do, and I don’t know if this product will help my audience.’ I only use products I’ve used before, because that trust you have with your audience is the most important thing in the world.” He says if you do recommend a product for the incredible commission but your audience has a bad experience with it, your credibility will be shot.
From what he describes, creating passive income definitely does not sound easy. It requires a serious ramp-up -- often requires 80- to 100-hour workweeks in the beginning, says Flynn. But once up and running, and depending on the content, some sites take fairly minimal maintenance. Green Exam Academy, the LEED exam study site he launched in 2008, takes just him four to five hours a month to maintain but brings in $250,000 annually.
Passive income investments can make an investor's life easier in many ways, particularly when a hands-off approach is preferred. The four options outlined here represent differing levels of diversification and risk. As with any investment, it's important to weigh the anticipated returns associated with a passive income opportunity against the potential for loss.
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