Passive income

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Passive income is income resulting from cash flow received on a regular basis, requiring minimal to no effort by the recipient to maintain it.

The U.S. Internal Revenue Service categorizes income into three broad types, active income, passive income, and portfolio income. It defines passive income as only coming from two sources: rental activity or "trade or business activities in which you do not materially participate." Other financial and government institutions also recognize it as an income obtained as a result of capital growth or in relation to negative gearing. Passive income is usually taxable.

The term "passive income" has become loosely used outside of the IRS definition. Business and opportunity seekers have used the term to describe work from home and be your own boss lifestyles. Robert Kiyosaki made the term popular outside of the IRS definition through his book Rich Dad Poor Dad. The book explained Kiyosaki's life of having two fathers. One that made money from an employer, and another "friends dad" that owned businesses and rental property. As Kiyosaki explained the terms to the reader he showed the two diverse methods of cash-flow present in the traditional United States households. This cult classic book then became the "must read" for every affiliate and network marketing group because it explained hard to understand principles in an applicable way.

Video Passive income

Earned Income V.s Passive Income

Their are two ways to earn income , you can get paid by somebody you work for or you can runs a business ,be self employed ,that would be considered active income earned income is often referred to linear active meaning one must constantly stay active to maintain the stream of income weather that is by working for a company earning a wage or salary, or starting your own business being self employed , earning commission on sales. one is required to put hours into the activity in order to maintain the same stream of income . once an individual chooses to to stop work the income also stops . Passive income on the other hand is is meant to be derived even with the absents of time spent and is referred to progressive passive income meaning their is little effort needed on from the individual receiving the passive income in order to grow the stream of income i.e home rentals the cost of renting is constantly increasing over time. therefore the stream of passive income also increases.

Maps Passive income

Examples

there are two kinds of passive activities

• Any of cash flowing property income- which include Profits from ownership of capital , Rent from ownership of resources such as Rental income and incoming cash flow from property or any piece of real estate, and interest from owning financial assets.
• Trade or business activities in which you don't materially participate during the year.

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Material Participation

In order for an activity to be considered passive, it has to be an activity in which the owner of it does not materially participate in. A person is considered to have a material participation in the activity if:

• They participate in the activity for more then 500 hours during the year
• One's participation is more than a 100 hours and there is no one else who is involved.
• Their participation is more then anyone else involved

But if the income is coming from a rental activity then no matter how much you actively materially participate in the rental, it will still be considered a passive activity.

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Rental Activities

In order to be considered a rental activity, tangible property is used by customers and the income paid from the activity comes from the amount paid for the use of the property and is not considered a rental if:

1. The average period of customer use is:

• 7 days or less
• 30 days or less and significant personal services were provided.

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See also

• Cash flow
• Capital gains
• Economic rent
• Profit
• Property income
• Rent seeking

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References

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External links

• Passive income, Investopedia
• ASIC's MoneySmart website
• Passive Income Streams,Profit Feeder
• What Is Passive Income, Cloud Ethernet

Source of article : Wikipedia