Passive Income: What It Is and Ideas for 2024 (2024)

What Is Passive Income?

Passive income is revenue that takes negligible effort to acquire. It includes earnings from rental properties,limited partnerships, and other projects where you're not involved in the continued generation of earnings. While these moneymaking ventures may have initially required your resources, time, or efforts, they generally eventually pay out automatically without you breaking a sweat.

Active income, meanwhile, is the type we know best: we get this from working jobs, being an entrepreneur, acting as a contractor, or anything else that requires ongoing effort or infusions of capital. There's also portfolio income, which earns returns from securities like stocks, bonds, and crypto. Each is taxable, but the IRS treats unearned income, its moniker for revenue gained passively, differently and often with lower rates.

25 Passive Income Ideas for 2024

1. Rent all or part of your property
2. Store things for people
3. Rent out items for people to use
4. Rent out your vehicle
5. Put up content on YouTube
6. Create an online course
7. Buy real estate
8. Sell stock photos
9. Design custom products
10. Deploy affiliate marketing
11. Advertise on your car
12. Peer-to-peer lending
13. Use cash-back rewards
14. Create an app
15. Flip retail products
16. Automated dropshipping
17. Create an ecommerce subscription box
18. Buy a vending machine
19. License your music
20. Develop mobile games
21. Develop an Alexa skill or chatbot
22. Invest in a business
23. AI-backed automated social media management
24. AI-backed educational tools and apps
25. AI art and design
    

Passive vs. Active and Portfolio Income

There are three main categories of earnings: active, portfolio, and passive income. Let's examine the first two before going into more depth about passive income:

Active or earned income: Money earned from direct effort or work, such as salaries, wages, commissions, tips, or revenue from a business where you provide material participation. It is the most common form of income, is subject to standard income tax rates, is the primary source of earnings for most individuals and households, and includes investments that might later generate portfolio or passive income.

Portfolio or investment income: This is revenue from investments, including dividends, interest, capital gains, and other returns from stocks, bonds, currency exchange, and mutual funds. Unlike active income earned from employment or business activities, portfolio income is based on securities an individual or group owns. Yet, it's not passive income, though it seems to have many of the same elements.

One way to keep this in mind is as follows: Even though many people may wait months or years before reviewing or changing their portfolio components, an investor is constantly making decisions about buying or holding different securities. Thus, even if you don't change your portfolio for decades, it's your ongoing choice not to do so that makes income from it not wholly passive. The most salient point, in any event, is that the IRS treats portfolio or investment income often quite differently than passive income.

Types of Passive Income

Passive income is revenue you get neither from your portfolio nor wages and does not require an ongoing effort. The term “passive income” is frequently used loosely for any revenues, including investment returns, that appear to require little or no effort by the one receiving it. It doesn't help the confusion that a well-known strategy in equities is passive investing.

The IRS, which gets the last word on this when you're filing your taxes, rules out the following as passive income: “interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business,” income tax refunds, and income derived from the cancellation of debt. Meanwhile, the agency defines passive or unearned income as “net rental income,” income from a “business in which the taxpayer does not materially participate,” and, in some cases, self-charged interest. Let's deal with these in turn:

Rental Properties

Rental properties are defined as passive income with a couple of exceptions. If you’re a real estate professional, any rental income that you’re making counts as active income. If you’re self-renting,meaning that you own a space and rent it out to a corporation or partnership where you conduct business, that also doesn't constitute passive income. (That's unless the lease was signed before 1988.)

Income from leasing land does notqualify as passive income, either. However, a landowner can benefit from passive income loss rules if the property nets a loss during the tax year.

Self-Charged Interest

When money is lent to a partnership or an S corporation acting as a pass-through entity (essentially, a business designed to reduce the effects of double taxation) by the corporation's owner, the interest income on that can qualify as passive income.

Businesses In Which You Don't "Materially Participate"

Investing in a business where you don’t materially participate offers the potential for passive income. This typically involves putting capital into a venture without involvement in its day-to-day operations or management decisions. The key is that your role is not active; your involvement is primarily financial.

This kind of investment can appeal to those diversifying their income streams but don’t have the time to engage in a business themselves. The returns are usually generated through profit-sharing, depending on the entity's business, allowing you to benefit from its activity without the demands of actively managing a business whose trade you may know little about.

Here’s an example. Suppose you put $500,000 into a candy store with the agreement that the owners would pay you a percentage of the earnings. This would be considered passive income as long as you do notparticipate in the operation of the business other than investing. If you help manage the company or take up the tasty role of eating each candy to be sold to recommend what to stock, your efforts may count as “material “participation.”

Here are the IRS’s criteria for material participation:

• If you’ve dedicated more than 500 hours to a business or activity fromwhich you’re profiting
• If your participation in an activity has been “substantially all” of the participation for that tax year
• If you’ve participated up to 100 hours, which is at least as much as any other person involved in the activity

Tax Treatment of Passive Income

While advantageous for generating earnings without active involvement, passive income has its own tax implications. The nature of the income—be it from rental properties, interest, or partnerships—dictates its tax treatment.

When you record a loss on a passive activity, only passive-activity profits canhave their deductions offset instead of the income as a whole. It would be prudent to ensure that all your passive activities were classified that way to make the most of the tax deduction. These are allotted and applied to account for the next year’s earnings or losses.

To save time and effort, you can group two or more passive activities into one larger activity if you form an “appropriate economic unit,” according to the IRS. When you do this, instead of providing material participation in several activities, you only have to provide it for the activity as a whole. In addition, if you includeseveral activities in one group and have to dispose of one of those activities, then you’ve only done away with part of a larger activity as opposed to all of a smaller one. The organizing principle is thatif the activities are located in the same geographic area, if the activities have similarities in the types of business,orif the activities are somehow interdependent, they can be grouped.

How to Make Money from Passive Income

Passive income can be a great way to generate some extra cash flow and supplement regular earnings from your job. While some of the ideas below doubtless wouldn't pass muster with the IRS as passive income, these are all streams of income where you can limit your involvement to the beginning of the venture and expend less time or effort afterward. For 2024, we've included ideas that include leveraging artificial intelligence as a means for creating products that provide money in an ongoing fashion.

1. Rent all or part of your property: Renting your property, either entirely or partially can provide regular rental income. This could include short-term rentals through platforms like Airbnb or long-term leasing.
2. Store things for people: If you have extra space in your home or on your property to store items for others, you can do so for a fee through platforms like Neighbor or StoreAtMyHouse. This can be especially profitable in urban areas where storage space is at a premium.
3. Rent out items for people to use: Offer items you own, like tools or specialized equipment, for rent to others. This can include anything from gardening tools to camping gear.
4. Rent out your vehicle: Lease your car to others when not in use through car rental platforms like Turo, making money when your car is idle.
5. Put up content on YouTube: While most who earn money from YouTube have a constant presence, it could be you have an idea for content that fits a perennial need and can earn you income from ads, sponsorships, or affiliate marketing.
6. Create an online course: Share your expertise by designing and selling courses in your field of knowledge. Platforms like Udemy are a popular choice. While putting a course up with lectures, quizzes, and so on is a lot of work, some courses resonate and earn their creators money for years down the road.
7. Buy real estate: Perhaps the oldest way to earn passive income on this list. Invest in property to rent or sell at a profit. Consider different markets and property types for the best investment opportunities.
8. Sell stock photos: You can earn royalties by selling your photography to stock photo websites like Shutterstock or Adobe Stock.
9. Design custom products: Create and sell unique product designs online. Use platforms like Etsy or Shopify to reach a wider market.
10. Deploy affiliate marketing: Earn commission by promoting other companies' products on your platform.
11. Advertise on your car: Turn your vehicle into a moving billboard for businesses using services like Wrapify or Carvertise.
12. Peer-to-peer lending: Lending money through peer-to-peer lending platforms like LendingClub and earning interest can earn you more than you would from a traditional savings account.
13. Use cash-back rewards: Earn rewards or cash back on credit card or app purchases. Use your apps and credit cards that offer the best rewards for your spending habits.
14. Create an app: Develop a mobile app and generate income through sales or ads. This requires some technical skill but can be highly rewarding if the app meets a market need.
15. Flip retail products: Buy products at a lower price and resell them for a profit, commonly through online marketplaces like eBay or Amazon.
16. Automated dropshipping: Run an ecommerce store without holding inventory, using a dropship model. This involves selling products that are then shipped directly from the supplier to the customer.
17. Create an ecommerce subscription box: Offer a subscription service for a curated box of goods, focusing on a specific niche like beauty products, food items, or your favorite hobby.
18. Buy a vending machine: Buy and place vending machines in strategic locations for passive revenue. Ideal locations include high-traffic areas like malls, offices, or schools.
19. License your music: This can be through platforms like AudioJungle or by directly licensing to content creators and businesses.
20. Develop mobile games: Create games for smartphones and earn through in-app purchases or ads. Success in this field depends on creating engaging and addictive gameplay.
21. Develop an Alexa skill or chatbot: Create voice-activated functionalities or chatbots for platforms like Amazon Alexa. These can be informational, entertainment-based, or service-oriented.
22. Invest in a business: Provide capital for a business and earn a share of the profits. This could be through angel investing, venture capital, or smaller local business investments, or through crowdsourcing investment platforms.
23. AI-backed automated social media management: Use AI to manage and optimize social media accounts for clients. This can include content creation, posting schedules, and engagement analysis.
24. AI-backed educational tools and apps: Create AI-driven educational applications and tools that create revenue through automated language learning tools, tutoring apps, or educational games.
25. AI art and design: Generate and sell art or designs created using AI image generators. This new field is growing and offers prospects if you find the right avenue for your creativity.

The Bottom Line

Passive income can be derived over time using different means. From renting out property and leveraging automated technologies to creating digital content, these avenues offer the potential for sustainable financial growth. While each method carries its own set of risks and rewards, the key to successful passive income lies in initial strategizing and occasional monitoring. As we move further into an era where traditional income models are being supplanted by gig and other non-traditional forms of work, many are finding they need more flexible income streams as they work toward a more secure financial foundation for themselves.