Define the cash flow
Passive income usually means money earned without hourly labor—dividends, bond interest, REIT payouts, royalties. Rental income can be semi-passive after systems, rarely zero effort.
Why it matters
“Passive” still means tax forms, interest-rate risk for bonds, tenant or manager work for rentals, and knowing dividend yield is not the same as total return.
Dividends vs selling shares
A high dividend is not “extra” return; it is often return delivered as cash instead of price appreciation. Total return still matters for long growth.
Model cash throw-off
Mistakes
- Chasing yield without checking payout sustainability.
- Ignoring ordinary income tax on many bond and REIT distributions in taxable accounts.
Use the calculator
FAQ
- Is passive income tax-free?
Rarely. Account type and asset class determine how IRS treats it.