Passive Income
Candlefocus EditorPassive income refers to earnings produced from activities that do not require a direct exchange of labor or material resources. Instead, passive income is earned through the use of money, assets, or investments that generate money over time. Passive income is typically generated through investments such as stocks, bonds, mutual funds, real estate, rental properties, and limited partnerships.
Passive income, often referred to as "earned income" or "alternative income," provides an opportunity for individuals to increase their wealth or replace their current earned income, often supplementing their total income. Passive income can be any type of income that is generated without actively trading time or money, such as stock dividends, interest on investments, royalties off of books, music pieces or inventions, rental fees and more.
From the standpoint of taxes, passive income is income generated from other sources outside of a regular job or business. This means that a worker would not receive a salary or wage from another person, but would still be eligible to pay taxes on their passive income. According to the Internal Revenue Service (IRS), the requirements to be considered a passive income must meet certain material participation tests and time tests.
One of the primary advantages of passive income is that it does not require the same level of commitment and time as does working for a wage or salary. Moreover, it can provide an ongoing source of income, making it ideal for investors who cannot commit much time to the market.
Although it is possible to make a good income from passive income activities, it is also important to understand that it requires a significant up-front investment and can bear considerable risk. For example, if one relies solely on rental property as a source of passive income, the failure to make mortgage or maintenance payments may lead to the loss of the property and all future income.
Overall, passive income can provide a great opportunity for individuals to build wealth, supplement their income, and save for retirement. By taking the time to research and understand the primary sources of passive income, investors can take the necessary steps to determine which income streams are right for them and their financial situation.