3 Best Passive Income Ideas to Generate Cash Flow
Toby Mathis Esq | Tax Planning & Asset Protection・2 minutes read
Passive income sources like dividends and real estate investments offer tax advantages over active income, providing a steady stream of cash flow. Investing in dividend stocks, selling options on stocks, and entering the rental market are practical ways to increase passive income in 2020.
Insights
- Passive income, such as dividends and rental income, offers tax advantages over active income, with preferential tax rates and exemptions from self-employment tax, making it a lucrative investment option.
- Real estate investments, including REITs and rental properties, provide a steady stream of passive income with tax benefits like depreciation, offering a hands-off approach to generating cash flow and building wealth for investors.
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Recent questions
How can I increase passive income in 2020?
Toby Mathis suggests three ways to increase passive income for 2020. These include investing in dividend stocks, selling options on stocks, and venturing into the rental market to provide housing and generate cash flow. Passive income sources like dividends and short-term capital gains from selling options, as well as making rents through real estate investments, can help diversify income streams and provide financial stability.
What are the advantages of passive income?
Passive income, which includes rents, royalties, dividends, interest, and capital gains, offers several advantages. It avoids social security taxes and Medicare deductions, providing a tax-efficient way to generate income. Passive income sources like dividends are recommended for their tax advantages, with dividends being taxed at preferential rates of 0%, 15%, or 20%, based on income levels. This different tax treatment compared to active income can lead to lower tax liabilities and increased financial flexibility.
How can I generate additional income from stocks?
One way to generate additional income from stocks is by selling out-of-the-money calls against owned stocks in the stock market. This strategy involves owning at least 100 shares of a stock and selling option contracts that cover 100 shares. By selling options, investors can generate extra income while potentially benefiting from stock price appreciation. This method provides a different tax treatment compared to active income, as option income is taxed at ordinary tax rates and is not subject to self-employment tax.
What are some real estate investment options for passive income?
Real estate investment options for passive income include buying Real Estate Investment Trusts (REITs) and owning single-family residences. REITs like Federal Realty Trust pay dividends based on profits from various real estate holdings, offering a way to invest in real estate without directly owning properties. Buying affordable properties for rental purposes can provide positive cash flow, especially in areas with high demand for housing and increasing rents. Real estate investments offer tax advantages through depreciation, allowing for income offsetting and reduced tax liabilities.
Why is passive income from real estate investments attractive?
Passive income from real estate investments is attractive due to its tax advantages and steady cash flow. Real estate investments provide a tax-advantaged alternative to active income, allowing for a consistent stream of income without direct involvement in day-to-day operations. By focusing on properties with positive cash flow, high demand for housing, and increasing rents, investors can benefit from rental income and potential property appreciation. Additionally, real estate investments offer tax benefits through depreciation, making it a lucrative option for generating passive income.
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Summary
00:00
"Boost Passive Income with Dividends and Options"
- Toby Mathis, a founding partner at Anderson Business Advisors, discusses three ways to increase passive income for 2020.
- Passive income includes rents, royalties, dividends, interest, and capital gains, not including active income.
- Passive income is advantageous as it avoids social security taxes and Medicare deductions.
- Social security taxes amount to 12.4% on every dollar, with a slight deduction on half of it.
- Passive income sources like dividends are recommended for tax advantages.
- Dividend kings and aristocrats, companies paying increasing dividends for 25+ years, are ideal investments.
- Selling out-of-the-money calls against owned stocks in the stock market can generate additional income.
- Selling options requires owning at least 100 shares, with one option contract covering 100 shares.
- Dividends are taxed at preferential rates of 0%, 15%, or 20%, based on income levels, offering tax advantages over active income.
- Option income is taxed at ordinary tax rates, not subject to self-employment tax, providing a different tax treatment compared to active income.
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Maximizing Passive Income Through Real Estate
- Tax brackets determine the percentage at which income is taxed, with lower brackets potentially leading to no tax payment if below the standard deduction of $24,000 annually.
- Passive income sources include dividends and short-term capital gains from selling options, as well as making rents through real estate investments.
- Real estate investment options include buying Real Estate Investment Trusts (REITs) for those with limited funds or owning single-family residences for those with more capital.
- REITs like Federal Realty Trust pay dividends based on profits from various real estate holdings, offering a way to invest in real estate without directly owning properties.
- Real estate investment valuation should focus on the cap rate, which calculates the return on investment based on gross rents minus operating expenses.
- Buying affordable properties for rental purposes can provide positive cash flow, especially in areas with high demand for housing and increasing rents due to limited inventory.
- Real estate investments offer tax advantages through depreciation, allowing for offsetting income and reducing tax liabilities, making it an attractive option for passive income.
- Passive income from real estate investments provides a tax-advantaged alternative to active income, allowing for a steady stream of cash flow without direct involvement in day-to-day operations.
- Three simple ways to incorporate passive income into a portfolio include investing in dividend stocks, selling options on stocks, and venturing into the rental market to provide much-needed housing and generate cash flow.
