What Is The Passive Income Tax Rate?

If your are deciding whether to invest in real estate actively or passively, you must first consider several factors. Active investors, for example, tend to be more hands-on and favor flips or wholesales. Passive investors, on the other hand, tend to gravitate towards buy-and-hold assets. It is also worth noting one additional difference investors need to account for: the passive income tax rate.

As you will soon discover, passive income is technically taxed a lot like active income. While the two sources of income are relatively similar, passive income awards qualifying earners with several benefits that can be realized at the time taxes are due. Keep reading to discover if you’re eligible.


Types of passive income

Passive Income

Passive income is typically used in the real estate community to describe the profits generated as the result of little or no effort on behalf of the person receiving them. In other words, passive income is exactly what it sounds like: a stream of income that isn’t contingent on trading time for money. Subsequently, there are two kinds of passive real estate activities:

  • ”Rentals, whether dealing in equipment or real estate assets, regardless of how much time is spent managing performance.
  • A real estate company that makes the conscious decision to decrease their active participation on a regular, continuous, and substantial basis.”

Active Income

As the counterpart to passive income, active income represents profits earned from performing a service. Active income is, therefore, the direct result of trading time for money. In the world of real estate investing, generating active income requires investors to continually buy and sell properties; their success or failure is entirely contingent on the effort they put into a deal. That said, active income isn’t relegated to real estate investors. According to the IRS, active income may also be derived from the following activities:

  • Salaries, wages and 1099 commission income
  • Guaranteed payments
  • Interest and dividends
  • Stocks and bonds
  • Sale of undeveloped land or other investment property
  • Royalties derived in the ordinary course of business
  • Sole proprietorship or farm in which the taxpayer materially participates
  • Partnerships, S-Corporations, and limited liability companies in which the taxpayer materially participates
  • Trusts in which the fiduciary materially participates
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Disclaimer: The information contained herein was pulled from third party sites. Although this information was found from sources believed to be reliable, FortuneBuilders Inc. makes no ...

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