What is Passive Income? The Types of Passive Income

What is Passive Income

Passive income is any income you earn without putting any daily effort, unlike active income which needs a daily effort.

An individual can have a passive income by investing in a few ideas which comprise renting a property, building a blog, Real Estate investments

IRS treats the taxes on the basics of active income and passive income and has a very thin line to distinguish passive income

  • Business activities in which you do not actively take part during the year.
  • Rental activities in which you do not take part during the year unless you are a real estate agent.

Why is Passive Income Important?

The answer is actually very simple, and that is the relationship between time and money. Time is the most valuable commodity a person can ask for. Time is the greatest equalizer because every person has an equal share of it,

but only those who learn to manipulate it by working hard and establishing a passive source can live the desired life. And that is the reason why passive income is so important because time is more a lot more valuable than money.

Although money, can be earned, saved, spent, invested, squandered, and lost, we can’t spin back minutes on a clock. It is obvious that most of the free world needs to work for a living, consuming much of the time they have in work, this precious asset needs to be prioritized.

Passive income is one of the most important reasons that the rich get richer. It is how you detach your ability and skills to earn from the limited time that you have throughout the day. With passive income, you get the power to make money while you sleep alongside make money while you’re awake.

However, creating a passive income stream is far from easy. It takes an enormous amount of effort and investment of your time with very little return in the beginning. It involves an overall sense of frustration and an enormous learning curve.

Still, it’s one of the most worthwhile investments of your time that you could possibly engage in.

Types of Passive Income Activities

There are mainly two types of passive activities:
  • Making money by renting a property, cash flow by real estate investment, cash flow in the form of interest by any financial asset.
  • Trade or business-related activities in which an individual does not need to take part in any of the operations of a business other than investing.

Difference Between Material Participation and Non-Material Participation


Material participation
: According to IRS Material participation means when an individual actively takes part in the production of the business.

To determine if you are a material participant in the firm IRS uses seven tests. In which an individual only has to pass a single test to qualify for the material participant.

Tests include participating for more than 500 hours in the business throughout the year, participating in the business throughout the entire year, or participating more than 100 hours during the entire year.

The difference between active and passive participation is a very important factor for taxes as well. Taxpayers can claim for losses that are generated through passive income.

Non-material participation: According to IRS if an individual is not taking any part in the firm or giving any input for the production of the company or business, then he or she is only making money through investments or by renting a property then all this comes under non-material participation.

Why Build Passive Income

In this world, everyone wants to earn some extra money without making any physical activity or giving any time to that work.

There are several benefits of having a passive income.

  1. Opportunity to retire early
  2. Protect an individual from any kind of loss such as getting fired from the job.
  3. Increases your wealth.
  4. Individual can fulfil his or her need whenever they feel like.

Few Passive Income ideas

Real Estate: One of the ways of having passive income is purchasing real estate and renting it to the tenants. Renting is a great source of passive income, but it is not the most preferable in making passive income because you have to give a lot of time to it.

Investing: Investing is one of the best ways of having a passive income. Investing in a great plan for creating income for retirement but you should invest for the long-term which will give you a great return.

Follow Nerdwallet.com if you're a beginner and here's the resource link how to start Investing

Digital products: By selling digital products you can also generate income.

Best practices to sell a digital product: Know everything about it and the profitable product ideas by oberlo.com

Start a Blog/Youtube: If you have a great idea and which attracts a lot of audiences and you get a log of traffic you can earn through that.

Blogging tips: Follow the Neil Patel blog who co-founder of Ubersuggest, Crazy Egg, Hello Bar, and KISSmetrics.

Conclusion

Above passive income, ideas can work forever. Don’t trust any other passive income ideas that promise a quick return and require huge amounts of money at the starting point. Look for income that is profitable and trustworthy. Do your research before doing any of the passive income work.

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