Passive Income Generator (PIG)

Definition

A Passive Income Generator (PIG) is an income-producing asset or investment that generates passive income, which can be used to counterbalance passive losses. Passive income is derived from enterprises in which the investor is not actively involved, such as rental properties, dividends, or interest from savings. Under the 1986 tax act, passive income can offset passive losses, but cannot be used against portfolio income or active income. Without a PIG to offset the loss, the loss would be carried forward in a suspense account.

Examples

Example 1: Rental Real Estate

• A property owner, Perry, has rental real estate that produces a tax loss. The tax loss can be offset by passive income derived from another rental property, making the rental property a practical Passive Income Generator.

Example 2: Peer-to-Peer Lending

• Through platforms like Lending Club, investors can earn interest income on loans provided to individuals. This interest income serves as passive income, potentially offsetting passive losses from other endeavors like rental properties.

Example 3: Real Estate Investment Trusts (REITs)

• Dividends from REITs are considered passive income. If an investor incurs passive losses from another source, such as a vacation rental property, they can use dividends from their REIT investments to offset these losses.

Frequently Asked Questions (FAQs)

Q1: What qualifies as passive income?

• A1: Passive income is generated from rental real estate, limited partnerships, or other businesses in which the individual doesn’t actively participate.

Q2: Can passive losses be offset by active or portfolio income?

• A2: No, passive losses can only be offset by passive income under the 1986 tax act.

Q3: What happens to unutilized passive losses?

• A3: Unused passive losses are carried forward to subsequent tax years and can offset future passive income.

Q4: Are dividends from stocks considered passive income?

• A4: Generally, dividends are considered as portfolio income and not passive income unless they come from investments structured to be passive.

Q5: Is real estate considered a Passive Income Generator?

• A5: Yes, real estate that generates rental income is a common example of a Passive Income Generator.

Related Terms

1. Passive Income

• Income that requires little to no effort to earn and maintain, such as earnings from rental property or limited partnerships.

2. Passive Activity Loss Rules

• Tax regulations that limit the ability to use passive losses to offset active or portfolio income.

3. Active Income

• Earnings from labor, such as wages or business income from which the individual is actively involved.

4. Portfolio Income

• Income from investments, dividends, interest, and capital gains, which cannot offset passive losses.

5. Real Estate Investment Trusts (REITs)

• Companies that own, operate, or finance real estate that produces income, often considered for portfolio income but can serve passive income functions under certain conditions.

Online Resources

• IRS - Passive Activity Limits
• Investopedia - Passive Income Definition
• Lending Club Peer-to-Peer Lending

References

• Internal Revenue Service (IRS) Publications and Guidance
• Investopedia definitions and concepts

Suggested Books for Further Studies

• “The Book on Rental Property Investing” by Brandon Turner

  • This book provides a comprehensive guide on how to build wealth through rental properties.

• “Rich Dad Poor Dad” by Robert T. Kiyosaki

  • A classic book that discusses the difference between passive income strategies and active income activities.

• “Tax-Free Wealth” by Tom Wheelwright

  • This book offers insights on tax strategies and how they include passive income generation concepts to minimize tax burdens.

Real Estate Basics: Passive Income Generator (PIG) Fundamentals Quiz