Active Versus Passive Income

According to Investopedia, here are a few terms that a real estate investor should know:

What is Passive Income

cropped-cropped-cropped-img_3917_thumb1.jpgPassive 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.

Understanding Passive Income

Main EntranceThere are two main categories of income: active income and passive income. Active income is something where you will be investing lot of time. For example, consider you are working on a daily 9 to 5 job and get paid at the end of the month. if you stop working you don’t get paid. So you need to keep investing time to get paid. So you need to keep working  (or investing time) to get paid.

Passive income has been a relatively loosely used term in recent years. It’s been used to define money being earned regularly with little or no effort on the part of the person receiving it. Popular types of passive income include real estate and dividend stocks. Proponents of earning passive income tend to be boosters of a work-from-home and be-your-own-boss professional lifestyle. The type of earnings people usually associate with this are gains on stocks, interest, retirement pay, lottery winnings, online work and capital gains.

cropped-summit-swimming-pool1.jpgThe trouble with a job or “active income” strategy is that you always have to work or the income dries up. One of Warren Buffet’s famous quotes is  “If you don’t find a way to make money while you sleep, you will work until you die.” So it makes sense to build enough position financially to start chasing passive income. If you manage your money better than most of the American public during their career, you will have “passive income” that can allow you to gradually scale back your “active income” efforts to be able to retire early. The goal is to earn more passive income than your monthly expenses. The sooner you do it, the sooner you can retire. (i.e. we afford retirement because of years of putting money in investment accounts  or real estate and earning interest on these investments).

How is Passive Income Taxed?

deposit-clipart-gold_theme_money_dollars_clip_art_7759 - CopyYou can only treat rental real estate as an active business if you meet stricter tests to be a real estate professional, which requires at least 750 hours of service and more than half of all personal service you provide to be in the real estate category.

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.

In the Real Estate Market?

KW1784102f20KW.jpgBeach NorthYou should consider using a realtor.  I could save you money especially with new home builders and it does not cost you anything.  So why not? Let me save you money!!!  If you are interested in buying real estate (new home, existing home, or commercial property), please contact me (Alan Lane with Signature Realty Associates at 2234 Lithia Center Lane, Valrico, Florida).  

As a life long resident of Central Florida, I can help you find the right property for you whether it is in Orlando or as far south as Sarasota.  My email address is alanlane66@gmail.com, or call me at 813.205.9280.  If you are just starting your search, you can search the MLS for real estate opportunities on my website at this link.

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s