July 15, 2025
115: 3 Types of 'Passive Income' - Only One Lets You Keep 96%
Most people talk about passive income like it's a magic solution: do something once, and money just keeps rolling in. But the reality is a lot more complex — especially when it comes to how different types of income are taxed.
What many don't realize is that there’s a huge difference between portfolio income (like dividends or capital gains) and what the IRS truly considers passive income (like rental income). Misunderstanding these terms can lead to overpaying taxes — sometimes by tens of thousands of dollars.
In this breakdown, I walk through how the IRS classifies income, what truly counts as passive, and why some “passive income” strategies are actually active businesses in disguise — and taxed accordingly. That course that teaches you to build a digital product and call it passive? It might actually be a high-tax hustle if you’re not careful.
I also share some practical insights on how to build income streams that are not only sustainable but also tax-efficient. Whether you’re looking at rental properties, investments, digital products, or royalties, understanding how income is taxed is just as important as generating it.
By the end, you'll have a clear understanding of:
- What truly counts as passive income
- How portfolio income is taxed differently
- How to avoid common mistakes in income classification
- Legal strategies to reduce your tax burden with smarter planning
This is the kind of foundational knowledge that can transform how you approach financial freedom — not just how you earn, but how much you actually get to keep.
Transcript
WEBVTT
00:00.231 --> 00:13.279
[SPEAKER_00]: If I see one more, ten thousand dollars per month passive income course that's actually teaching you how to build a business that's taxed at closer to fifty percent, I'm going to lose it.
00:13.700 --> 00:14.440
[SPEAKER_00]: Here's the truth.
00:14.860 --> 00:20.164
[SPEAKER_00]: Ninety nine percent of the people using the term passive income are using it wrong.
00:20.384 --> 00:22.926
[SPEAKER_00]: And it's costing them a massive amount in taxes.
00:23.166 --> 00:27.809
[SPEAKER_00]: The IRS has very specific definitions for different types of income.
00:28.269 --> 00:34.975
[SPEAKER_00]: And when you understand them, you can literally cut your tax bill by tens of thousands of dollars.
00:35.435 --> 00:41.300
[SPEAKER_00]: So what if I told you that real passive income can be taxed at closer to zero percent?
00:42.021 --> 00:48.146
[SPEAKER_00]: Well, that passive course income that everyone's talking about gets hit at closer to fifty percent.
00:48.987 --> 00:55.252
[SPEAKER_00]: Stick around because I'm about to break down the three types of income that actually matter for building wealth.
00:58.590 --> 01:00.050
[SPEAKER_00]: Hello, I'm Christopher Nelson.
01:00.391 --> 01:05.212
[SPEAKER_00]: I built and run my own micro family office and teach others how to do the same thing.
01:05.632 --> 01:06.813
[SPEAKER_00]: I used to make the same mistake.
01:07.453 --> 01:12.554
[SPEAKER_00]: I would call all the income that came from my portfolio passive income.
01:13.395 --> 01:24.058
[SPEAKER_00]: But then this term continued to get overused, misapplied that I realized that if I really wanted to teach and educate you, I had to get more precise.
01:25.050 --> 01:26.070
[SPEAKER_00]: Because here's what happened.
01:26.690 --> 01:32.652
[SPEAKER_00]: I was lumping together all types of income streams that the IRS treats very differently.
01:33.552 --> 01:41.254
[SPEAKER_00]: And in my perception in what I was allocating time in effort to, it was costing me money and also strategic clarity.
01:41.494 --> 01:47.555
[SPEAKER_00]: So today, I want to give you my framework of what I use to categorize income properly.
01:48.195 --> 01:55.081
[SPEAKER_00]: I want to cover off on the three types of income that matter for wealth building, for managing tech millions.
01:55.762 --> 02:01.427
[SPEAKER_00]: I want to dial in on how the IRS taxes each one, talking about ranges.
02:01.667 --> 02:06.532
[SPEAKER_00]: Everyone's situation is going to be different, but it's important that you have a range and a marker.
02:07.112 --> 02:14.036
[SPEAKER_00]: And why precision and terminology can save you thousands when you're strategically focused on the right things.
02:14.296 --> 02:19.880
[SPEAKER_00]: And then all of this leads to how do you structure your portfolio for the maximum tax efficiency?
02:20.160 --> 02:31.506
[SPEAKER_00]: My goal is to give you the clarity to make better investment decisions and stop falling for passive income marketing that's really just a high tax business income in disguise.
02:31.987 --> 02:33.868
[SPEAKER_00]: So let's start with why this matters.
02:34.368 --> 02:43.217
[SPEAKER_00]: If you open YouTube, Instagram, or any finance blog, you're going to see passive income attached to everything.
02:43.717 --> 02:45.739
[SPEAKER_00]: YouTube ads equal passive income.
02:46.460 --> 02:51.665
[SPEAKER_00]: Drop shipping business passive income real estate passive income.
02:52.106 --> 02:57.531
[SPEAKER_00]: This is the problem because the reality is the IRS doesn't care what you call it.
02:58.743 --> 03:05.392
[SPEAKER_00]: They have very specific definitions, and those definitions determine how much tax you pay.
03:06.473 --> 03:14.003
[SPEAKER_00]: When I first got into investing in managing my portfolio as a business, I was calling everything passive income.
03:14.822 --> 03:31.508
[SPEAKER_00]: But then I started learning that my rental property income, my private equity income was being offset by depreciation while income from dividends or income from interest or income from my coaching was getting hammered at a lot of different tax trades.
03:31.888 --> 03:35.950
[SPEAKER_00]: So this is when I realized not all passive income is created equal.
03:36.668 --> 03:45.594
[SPEAKER_00]: In fact, the majority of what people call passive income is not passive income at all according to the IRS.
03:46.114 --> 03:50.697
[SPEAKER_00]: So I developed a simple framework to categorize income properly.
03:51.478 --> 03:59.423
[SPEAKER_00]: Three types that matter for wealth building for managing your money that each have very different tax implications.
04:00.538 --> 04:02.759
[SPEAKER_00]: Let me show you exactly how this works.
04:03.279 --> 04:07.301
[SPEAKER_00]: Here are the three categories that actually matter the most for wealth building.
04:07.821 --> 04:12.262
[SPEAKER_00]: Let's start with number one, passive income, the real deal.
04:13.123 --> 04:22.506
[SPEAKER_00]: So according to the IRS, passive income comes from rental real estate and businesses in which you don't materially participate.
04:22.966 --> 04:23.667
[SPEAKER_00]: And here's the key.
04:24.527 --> 04:31.514
[SPEAKER_00]: If you don't materially participate in these businesses, it comes with special tax advantages.
04:32.034 --> 04:36.098
[SPEAKER_00]: So, passive income is typically taxed at capital gains rate.
04:36.798 --> 04:37.999
[SPEAKER_00]: Zero to twenty percent.
04:38.738 --> 04:39.759
[SPEAKER_00]: That's a nice tax rate.
04:40.500 --> 04:42.682
[SPEAKER_00]: But here's where it gets really powerful.
04:43.482 --> 04:57.715
[SPEAKER_00]: Is you can deduct the depreciation of your real estate, of your business assets, machinery, computers, anything that's depreciable against your passive income.
04:58.856 --> 05:03.481
[SPEAKER_00]: And sometimes, even against your other active income as well in special situations.
05:04.496 --> 05:09.140
[SPEAKER_00]: So for example, you own a rental property generating fifty thousand dollars a year.
05:09.961 --> 05:14.865
[SPEAKER_00]: The depreciation deduction on that same asset might be forty thousand dollars.
05:15.626 --> 05:18.789
[SPEAKER_00]: So you only pay taxes on the ten thousand dollars.
05:18.929 --> 05:22.813
[SPEAKER_00]: And if that's at a tax rate of twenty percent, that's two thousand dollars.
05:23.413 --> 05:30.399
[SPEAKER_00]: So you've received fifty thousand dollars in income in cash flow and you only pay two thousand dollars in taxes.
05:31.344 --> 05:37.032
[SPEAKER_00]: that is incredibly powerful in its that type of investing that can replace your paycheck.
05:38.165 --> 05:51.269
[SPEAKER_00]: Now, there's even additional values here, too, because ten, thirty-one exchanges allow you to take fully appreciated assets, roll them into other like kind assets, and defer taxes indefinitely.
05:52.109 --> 06:01.052
[SPEAKER_00]: And when you die, if you're doing this right, and you're thinking about generational wealth, your errors can get stepped up basis, meaning higher value of assets,
06:01.632 --> 06:04.755
[SPEAKER_00]: but capital gains has been eliminated by your passing.
06:04.935 --> 06:09.520
[SPEAKER_00]: This is why real passive income, how the IRS defines it is special.
06:10.141 --> 06:11.262
[SPEAKER_00]: It's not about work.
06:11.963 --> 06:18.569
[SPEAKER_00]: It's truly about the tax treatment and getting this high value yield into your portfolio.
06:18.990 --> 06:21.452
[SPEAKER_00]: Number two is portfolio income.
06:22.133 --> 06:43.418
[SPEAKER_00]: Your portfolio income comes from your financial investments, stocks, bonds, reats, any other type of private equity that does not qualify as passive income does not have that magic depreciation component because all of those types of investments are going to have different types of tax treatments.
06:44.098 --> 06:48.341
[SPEAKER_00]: You will have qualified dividends that are coming from certain investments.
06:48.721 --> 06:53.363
[SPEAKER_00]: Those will qualify for zero to twenty percent a nice capital gains rate.
06:54.144 --> 07:00.648
[SPEAKER_00]: You can also have your interest income that's taxed at ten to thirty seven percent an ordinary income tax rate.
07:01.408 --> 07:04.371
[SPEAKER_00]: Read distributions, taxes or narrow income.
07:04.471 --> 07:13.041
[SPEAKER_00]: The key thing to understand is from your portfolio income, you're not going to have the depreciation benefits that comes from the passive income.
07:13.521 --> 07:17.385
[SPEAKER_00]: What you earn is also going to have a higher tax rate.
07:18.306 --> 07:27.091
[SPEAKER_00]: So let's use the example of the REIT, the REIT you get fifty thousand dollars of income from a particular REIT investment.
07:27.551 --> 07:33.755
[SPEAKER_00]: But if it's taxed at ordinary rates, that could be as much as eighteen thousand five hundred dollars in taxes.
07:34.650 --> 07:34.830
[SPEAKER_00]: Right?
07:35.030 --> 07:41.311
[SPEAKER_00]: This is very different in what you're actually going to have flow to your bottom line.
07:41.611 --> 07:52.774
[SPEAKER_00]: When you compare portfolio income from passive income, it's different in the sense that you can have phenomenal investments that are continuing to grow, but it's going to be taxed as a higher rate.
07:53.234 --> 07:56.855
[SPEAKER_00]: So that's going to be qualified as portfolio income.
07:57.175 --> 07:57.435
[SPEAKER_00]: Okay.
07:57.535 --> 08:02.916
[SPEAKER_00]: Number three is your business income, active creation.
08:03.816 --> 08:07.657
[SPEAKER_00]: This is where most passive income gurus are actually operating.
08:07.677 --> 08:18.939
[SPEAKER_00]: This is business income that's coming from coaching, courses, YouTube channels, affiliate marketing, drop shipping, anything else that you actively create or manage.
08:19.379 --> 08:22.199
[SPEAKER_00]: This is the tax bracket that gets hit the hardest.
08:22.759 --> 08:31.681
[SPEAKER_00]: It could get hit with ordinary income rates, so that's ten to thirty-seven percent, or it could also have a self-employment tax on top of it.
08:32.531 --> 08:37.417
[SPEAKER_00]: You may also be hit with state taxes up to another thirteen percent depending on your state.
08:37.838 --> 08:45.648
[SPEAKER_00]: The key thing to understand is many of these are also going to be run as businesses and have some operating expenses to go against the revenue.
08:46.208 --> 08:49.352
[SPEAKER_00]: But ultimately if you have a fifty thousand dollar course
08:50.073 --> 09:00.718
[SPEAKER_00]: that everyone's calling passive income in California, if you generate fifty thousand dollars, you have very lean margins, you can pay over twenty six thousand dollars in taxes.
09:00.998 --> 09:03.339
[SPEAKER_00]: That's a fifty-two percent effective tax rate.
09:03.819 --> 09:07.160
[SPEAKER_00]: This is where I just want to be honest and talk about the truth.
09:07.200 --> 09:11.382
[SPEAKER_00]: Like this is not passive income in how the IRS defines it.
09:11.902 --> 09:17.565
[SPEAKER_00]: It's truly business income and the IRS taxes it exactly like a business.
09:19.055 --> 09:34.120
[SPEAKER_00]: So now that you have these three true passive income portfolio income and business income, let me show you side by side why precision matters, why these definitions in these words really mean something.
09:34.660 --> 09:48.753
[SPEAKER_00]: Okay, I want to now line these up and show you that when you compare the taxes against these, this is going to change your complete perception and get you focused in on what is true passive income.
09:49.634 --> 09:57.722
[SPEAKER_00]: So for this exercise, let's take the same fifty thousand dollars of income and see how much you actually keep under each category.
09:58.698 --> 10:01.541
[SPEAKER_00]: So, true passive income, right?
10:01.621 --> 10:04.764
[SPEAKER_00]: We are investing in some private equity real estate.
10:05.225 --> 10:09.950
[SPEAKER_00]: Gross income from that investment, the income we receive is fifty thousand dollars.
10:10.671 --> 10:13.293
[SPEAKER_00]: The depreciation deduction is forty thousand dollars.
10:14.094 --> 10:36.776
[SPEAKER_00]: taxable income is ten and we're in the twenty percent tax bracket which is two thousand dollars net income forty eight thousand dollars beautiful we made fifty thousand dollars we have in our bank account forty eight thousand dollars now let's compare this against real estate in the public market a portfolio income coming from a rate
10:37.605 --> 10:42.606
[SPEAKER_00]: gross income of fifty thousand dollars, fifty thousand dollars of taxable income.
10:42.626 --> 10:46.927
[SPEAKER_00]: But we're going to tax that as a thirty seven percent ordinary income rate.
10:47.427 --> 10:50.428
[SPEAKER_00]: That's eighteen thousand five hundred dollars of taxes.
10:51.148 --> 10:54.408
[SPEAKER_00]: And you're taking home thirty one thousand five hundred.
10:54.688 --> 10:57.509
[SPEAKER_00]: Now let's go to fifty thousand dollars of business income.
10:57.909 --> 10:59.650
[SPEAKER_00]: This is from coaching sales.
11:00.210 --> 11:02.170
[SPEAKER_00]: So you generate fifty thousand dollars.
11:02.650 --> 11:06.191
[SPEAKER_00]: You then have a self employment tax of seven thousand six hundred fifty.
11:07.151 --> 11:31.869
[SPEAKER_00]: and you have the thirty seven percent bracket or income bracket that's eighteen thousand five hundred you're walking home with twenty three thousand eight hundred fifty so this is exactly my point the same fifty thousand dollars but when you look at these categories of income passive income forty eight thousand dollars take home that's ninety six percent of that gross revenue you're taking home portfolio income
11:32.469 --> 11:36.610
[SPEAKER_00]: You're taking home sixty three percent of it or thirty one thousand five hundred dollars.
11:36.890 --> 11:46.313
[SPEAKER_00]: But what everybody calls passive income really isn't it's business income and you're taking home forty eight percent of that at twenty three thousand eight hundred fifty.
11:47.353 --> 11:55.235
[SPEAKER_00]: So this is why these gurus that are talking about passive income and reusing that term are doing you a disservice.
11:56.155 --> 12:05.564
[SPEAKER_00]: They're really calling business income passive when it's taxed at literally double the rate of true real passive income.
12:05.844 --> 12:10.849
[SPEAKER_00]: So what's important for you for my money managers that are managing tech millions?
12:11.070 --> 12:19.978
[SPEAKER_00]: If you understand these differences, then you structure your wealth building to prioritize the most tax efficient income streams.
12:20.839 --> 12:24.002
[SPEAKER_00]: First, this is what's going to give you the best benefit.
12:24.402 --> 12:34.891
[SPEAKER_00]: Now, let me explain why these words and why being precise with them matters when it comes to wealth building and architecting your microfamily office.
12:35.151 --> 12:43.318
[SPEAKER_00]: Let's start with what is the order of prioritizing these different types of income that are the best for smart wealth building.
12:43.998 --> 12:47.222
[SPEAKER_00]: Number one, maximize passive income first.
12:47.903 --> 12:59.618
[SPEAKER_00]: This is your real estate in private equity that comes with depreciation and meets the IRS requirement because you're getting high income and you're getting at very tax efficiently.
13:00.843 --> 13:03.946
[SPEAKER_00]: The second priority is they're going to be portfolio income.
13:04.446 --> 13:06.708
[SPEAKER_00]: You can actually keep investments growing.
13:07.108 --> 13:09.570
[SPEAKER_00]: You don't even need to make them taxable immediately.
13:10.030 --> 13:18.918
[SPEAKER_00]: But that is your diversified investments that have a better tax treatment than business income, but not as great as passive income.
13:19.618 --> 13:24.641
[SPEAKER_00]: Number three is scale business income strategically, right?
13:24.821 --> 13:31.466
[SPEAKER_00]: Know the tax cost of your business income and prioritize passive income and portfolio income first.
13:32.186 --> 13:45.395
[SPEAKER_00]: So when I restructured my micro family office, I prioritized my private equity investments, real estate investments that could generate passive income complemented with depreciation benefits.
13:46.477 --> 13:55.121
[SPEAKER_00]: I was then diversifying and growing my stock portfolio bond portfolio and other investments that didn't have his beneficial tax treatment.
13:55.782 --> 13:59.444
[SPEAKER_00]: This is what allowed me to truly replace my paycheck.
14:00.644 --> 14:07.688
[SPEAKER_00]: Now, the business income coming in from coaching and courses, that's funding the first two categories.
14:08.646 --> 14:17.348
[SPEAKER_00]: I continue to take any type of income I get from my businesses and I buy more of these assets that are going to generate true passive income.
14:17.888 --> 14:28.791
[SPEAKER_00]: Today, ninety-five percent of my paycheck replacement is coming from passive income investments that are tax-free or the taxes being deferred.
14:29.471 --> 14:34.312
[SPEAKER_00]: while I use the higher tax business income to buy more of these investments.
14:34.912 --> 14:47.694
[SPEAKER_00]: This is an important strategy call out is that I am architecting in building my micro-family office to generate not just from my generation, but for the next tax-efficient passive income.
14:48.895 --> 14:55.876
[SPEAKER_00]: The challenges that many people chase this highest gross return, but they don't consider the after tax returns.
14:56.879 --> 15:03.033
[SPEAKER_00]: A six percent passive income return might be a ten percent business income return after taxes.
15:04.036 --> 15:05.118
[SPEAKER_00]: You have to do the math.
15:06.211 --> 15:07.572
[SPEAKER_00]: So here's the framework, right?
15:08.052 --> 15:08.872
[SPEAKER_00]: Passive income.
15:09.033 --> 15:10.593
[SPEAKER_00]: That builds your foundation.
15:11.154 --> 15:14.015
[SPEAKER_00]: Lowest taxes, highest amount of income.
15:14.596 --> 15:19.358
[SPEAKER_00]: That is going to be your stable, your foundational level.
15:20.018 --> 15:25.081
[SPEAKER_00]: Then you have your portfolio income, providing diversification and liquidity.
15:25.521 --> 15:33.046
[SPEAKER_00]: Then you stack onto that, your business income that accelerates wealth building by buying more of the passive income.
15:33.066 --> 15:35.187
[SPEAKER_00]: It gets reinvested into the other two.
15:35.807 --> 15:41.028
[SPEAKER_00]: This is how you build generational wealth instead of just high tax income streams.
15:41.608 --> 15:45.049
[SPEAKER_00]: So here's how you take this framework and you start putting it into practice.
15:45.809 --> 15:54.231
[SPEAKER_00]: First and foremost, audit the current income that is coming from your micro family office, from all your sources of income, right?
15:54.311 --> 15:55.591
[SPEAKER_00]: And then you want to categorize them.
15:56.272 --> 15:59.832
[SPEAKER_00]: What do you have that's truly passive income with tax benefits?
16:00.453 --> 16:01.933
[SPEAKER_00]: Call that out and set that aside.
16:02.573 --> 16:06.176
[SPEAKER_00]: Then what is your portfolio income that you're getting from your investments?
16:07.457 --> 16:10.859
[SPEAKER_00]: Do you have business income that you're calling passive that's really not?
16:11.460 --> 16:12.721
[SPEAKER_00]: Allocate that appropriately.
16:12.741 --> 16:17.084
[SPEAKER_00]: And if for many of you, you're going to have W-II income as well.
16:17.444 --> 16:23.389
[SPEAKER_00]: And then you're also going to have income coming from your equity compensation categorized those appropriately.
16:24.389 --> 16:29.974
[SPEAKER_00]: Now calculate your real after tax returns on each of those different types of investments.
16:31.076 --> 16:38.361
[SPEAKER_00]: Don't just look at gross returns, make sure that you get real with yourself and understand what is the tax rate for each income type.
16:39.201 --> 16:42.543
[SPEAKER_00]: Where are depreciation benefits available that you can use?
16:43.284 --> 16:50.928
[SPEAKER_00]: Do you also need to make sure that you're applying self-employment taxes for business income if you're doing some consulting or you do have a side hustle?
16:51.328 --> 16:56.572
[SPEAKER_00]: And the key thing is to rebalance your strategy based on your analysis.
16:57.637 --> 17:07.084
[SPEAKER_00]: How do you prioritize building true passive income and generating paycheck replacement income that is tax-protected?
17:08.325 --> 17:13.650
[SPEAKER_00]: How do you then diversify with portfolio investments for liquidity and better tax treatment?
17:14.790 --> 17:26.780
[SPEAKER_00]: Then ultimately, how do you use whether it's your business income or it's your equity compensation to fund these other two categories so that you're building strategically your microfamily office?
17:28.143 --> 17:28.303
[SPEAKER_00]: Right?
17:28.363 --> 17:30.064
[SPEAKER_00]: For you as tech professionals, right?
17:30.405 --> 17:35.088
[SPEAKER_00]: You're high W to income automatically puts you in a top tax bracket.
17:36.029 --> 17:56.605
[SPEAKER_00]: But you can actually leverage passive income to get out of there by continuing to invest in assets that generate income that's tax protected because sometimes you only need a hundred and seventy five thousand dollars in tax protected income to replace two hundred and fifty thousand dollars in W to income.
17:57.205 --> 18:18.380
[SPEAKER_00]: The reality is that if you're generating significant business income, you can also really think about how do you structure it through your family office and different entities that can continue to invest in passive income opportunities that you're converting high tax business income into lower tax passive income over time.
18:19.321 --> 18:20.682
[SPEAKER_00]: This is how you play it with.
18:21.242 --> 18:23.263
[SPEAKER_00]: Here's what you need to do right now.
18:24.219 --> 18:26.980
[SPEAKER_00]: First, stop calling everything passive income.
18:27.581 --> 18:29.502
[SPEAKER_00]: Use the proper terminology.
18:30.142 --> 18:38.606
[SPEAKER_00]: Passive income for real estate and private equity that has depreciation benefits, we are not actively involved in the business.
18:39.587 --> 18:48.271
[SPEAKER_00]: Portfolio income is for all of your other financial market and private equity investments that don't have depreciation associated with it.
18:49.225 --> 18:53.287
[SPEAKER_00]: Then you have your business income, anything you actively create or manage.
18:54.027 --> 18:59.010
[SPEAKER_00]: And then in addition to that, you have your W-II income, anything you earn as a wage.
19:00.746 --> 19:02.707
[SPEAKER_00]: run the math on your current income streams.
19:03.347 --> 19:11.290
[SPEAKER_00]: You might discover that some of your highest performing investments are actually underperforming when it comes to taking home the dollars.
19:11.751 --> 19:16.833
[SPEAKER_00]: Rearchitect in structure you wealth building to maximize passive income first.
19:17.073 --> 19:26.797
[SPEAKER_00]: This is the foundational way of every micro family office that I work with is how do you flip the script and focus a hundred percent on tax protected income?
19:27.217 --> 19:32.478
[SPEAKER_00]: the precision and terminology and tax strategy is what we've built into wealth ops framework.
19:33.338 --> 19:42.980
[SPEAKER_00]: Wealth ops is not just about making money, it's about managing it and keeping more of it so that it's structured for long-term wealth from multiple generations.
19:43.500 --> 19:52.081
[SPEAKER_00]: The reality is the difference between a forty-eight percent tax rate and a four percent tax rate on the same income amount is not just math.
19:52.902 --> 19:54.982
[SPEAKER_00]: It's the difference between actually building wealth
19:55.786 --> 19:57.428
[SPEAKER_00]: and staying on the income treadmill.
19:57.868 --> 20:13.462
[SPEAKER_00]: If this level of precision and strategy resonates with you, hit subscribe right now because I'm going to continue making videos that are breaking down more advanced wealth management concepts, specifically for hiring tech professionals who work for equity income.
20:14.223 --> 20:28.006
[SPEAKER_00]: And if you really want to build generational wealth and you want to understand deeper of how to structure your portfolio like a business, I've encouraged you to think about attending our monthly live event, go to wealthops.live.
20:29.486 --> 20:33.927
[SPEAKER_00]: And I think the final takeaway is remember words matter, taxes matter more.
20:34.527 --> 20:39.948
[SPEAKER_00]: And the precision in both is going to determine whether you build wealth or just generate taxable income.
00:00.231 --> 00:13.279
[SPEAKER_00]: If I see one more, ten thousand dollars per month passive income course that's actually teaching you how to build a business that's taxed at closer to fifty percent, I'm going to lose it.
00:13.700 --> 00:14.440
[SPEAKER_00]: Here's the truth.
00:14.860 --> 00:20.164
[SPEAKER_00]: Ninety nine percent of the people using the term passive income are using it wrong.
00:20.384 --> 00:22.926
[SPEAKER_00]: And it's costing them a massive amount in taxes.
00:23.166 --> 00:27.809
[SPEAKER_00]: The IRS has very specific definitions for different types of income.
00:28.269 --> 00:34.975
[SPEAKER_00]: And when you understand them, you can literally cut your tax bill by tens of thousands of dollars.
00:35.435 --> 00:41.300
[SPEAKER_00]: So what if I told you that real passive income can be taxed at closer to zero percent?
00:42.021 --> 00:48.146
[SPEAKER_00]: Well, that passive course income that everyone's talking about gets hit at closer to fifty percent.
00:48.987 --> 00:55.252
[SPEAKER_00]: Stick around because I'm about to break down the three types of income that actually matter for building wealth.
00:58.590 --> 01:00.050
[SPEAKER_00]: Hello, I'm Christopher Nelson.
01:00.391 --> 01:05.212
[SPEAKER_00]: I built and run my own micro family office and teach others how to do the same thing.
01:05.632 --> 01:06.813
[SPEAKER_00]: I used to make the same mistake.
01:07.453 --> 01:12.554
[SPEAKER_00]: I would call all the income that came from my portfolio passive income.
01:13.395 --> 01:24.058
[SPEAKER_00]: But then this term continued to get overused, misapplied that I realized that if I really wanted to teach and educate you, I had to get more precise.
01:25.050 --> 01:26.070
[SPEAKER_00]: Because here's what happened.
01:26.690 --> 01:32.652
[SPEAKER_00]: I was lumping together all types of income streams that the IRS treats very differently.
01:33.552 --> 01:41.254
[SPEAKER_00]: And in my perception in what I was allocating time in effort to, it was costing me money and also strategic clarity.
01:41.494 --> 01:47.555
[SPEAKER_00]: So today, I want to give you my framework of what I use to categorize income properly.
01:48.195 --> 01:55.081
[SPEAKER_00]: I want to cover off on the three types of income that matter for wealth building, for managing tech millions.
01:55.762 --> 02:01.427
[SPEAKER_00]: I want to dial in on how the IRS taxes each one, talking about ranges.
02:01.667 --> 02:06.532
[SPEAKER_00]: Everyone's situation is going to be different, but it's important that you have a range and a marker.
02:07.112 --> 02:14.036
[SPEAKER_00]: And why precision and terminology can save you thousands when you're strategically focused on the right things.
02:14.296 --> 02:19.880
[SPEAKER_00]: And then all of this leads to how do you structure your portfolio for the maximum tax efficiency?
02:20.160 --> 02:31.506
[SPEAKER_00]: My goal is to give you the clarity to make better investment decisions and stop falling for passive income marketing that's really just a high tax business income in disguise.
02:31.987 --> 02:33.868
[SPEAKER_00]: So let's start with why this matters.
02:34.368 --> 02:43.217
[SPEAKER_00]: If you open YouTube, Instagram, or any finance blog, you're going to see passive income attached to everything.
02:43.717 --> 02:45.739
[SPEAKER_00]: YouTube ads equal passive income.
02:46.460 --> 02:51.665
[SPEAKER_00]: Drop shipping business passive income real estate passive income.
02:52.106 --> 02:57.531
[SPEAKER_00]: This is the problem because the reality is the IRS doesn't care what you call it.
02:58.743 --> 03:05.392
[SPEAKER_00]: They have very specific definitions, and those definitions determine how much tax you pay.
03:06.473 --> 03:14.003
[SPEAKER_00]: When I first got into investing in managing my portfolio as a business, I was calling everything passive income.
03:14.822 --> 03:31.508
[SPEAKER_00]: But then I started learning that my rental property income, my private equity income was being offset by depreciation while income from dividends or income from interest or income from my coaching was getting hammered at a lot of different tax trades.
03:31.888 --> 03:35.950
[SPEAKER_00]: So this is when I realized not all passive income is created equal.
03:36.668 --> 03:45.594
[SPEAKER_00]: In fact, the majority of what people call passive income is not passive income at all according to the IRS.
03:46.114 --> 03:50.697
[SPEAKER_00]: So I developed a simple framework to categorize income properly.
03:51.478 --> 03:59.423
[SPEAKER_00]: Three types that matter for wealth building for managing your money that each have very different tax implications.
04:00.538 --> 04:02.759
[SPEAKER_00]: Let me show you exactly how this works.
04:03.279 --> 04:07.301
[SPEAKER_00]: Here are the three categories that actually matter the most for wealth building.
04:07.821 --> 04:12.262
[SPEAKER_00]: Let's start with number one, passive income, the real deal.
04:13.123 --> 04:22.506
[SPEAKER_00]: So according to the IRS, passive income comes from rental real estate and businesses in which you don't materially participate.
04:22.966 --> 04:23.667
[SPEAKER_00]: And here's the key.
04:24.527 --> 04:31.514
[SPEAKER_00]: If you don't materially participate in these businesses, it comes with special tax advantages.
04:32.034 --> 04:36.098
[SPEAKER_00]: So, passive income is typically taxed at capital gains rate.
04:36.798 --> 04:37.999
[SPEAKER_00]: Zero to twenty percent.
04:38.738 --> 04:39.759
[SPEAKER_00]: That's a nice tax rate.
04:40.500 --> 04:42.682
[SPEAKER_00]: But here's where it gets really powerful.
04:43.482 --> 04:57.715
[SPEAKER_00]: Is you can deduct the depreciation of your real estate, of your business assets, machinery, computers, anything that's depreciable against your passive income.
04:58.856 --> 05:03.481
[SPEAKER_00]: And sometimes, even against your other active income as well in special situations.
05:04.496 --> 05:09.140
[SPEAKER_00]: So for example, you own a rental property generating fifty thousand dollars a year.
05:09.961 --> 05:14.865
[SPEAKER_00]: The depreciation deduction on that same asset might be forty thousand dollars.
05:15.626 --> 05:18.789
[SPEAKER_00]: So you only pay taxes on the ten thousand dollars.
05:18.929 --> 05:22.813
[SPEAKER_00]: And if that's at a tax rate of twenty percent, that's two thousand dollars.
05:23.413 --> 05:30.399
[SPEAKER_00]: So you've received fifty thousand dollars in income in cash flow and you only pay two thousand dollars in taxes.
05:31.344 --> 05:37.032
[SPEAKER_00]: that is incredibly powerful in its that type of investing that can replace your paycheck.
05:38.165 --> 05:51.269
[SPEAKER_00]: Now, there's even additional values here, too, because ten, thirty-one exchanges allow you to take fully appreciated assets, roll them into other like kind assets, and defer taxes indefinitely.
05:52.109 --> 06:01.052
[SPEAKER_00]: And when you die, if you're doing this right, and you're thinking about generational wealth, your errors can get stepped up basis, meaning higher value of assets,
06:01.632 --> 06:04.755
[SPEAKER_00]: but capital gains has been eliminated by your passing.
06:04.935 --> 06:09.520
[SPEAKER_00]: This is why real passive income, how the IRS defines it is special.
06:10.141 --> 06:11.262
[SPEAKER_00]: It's not about work.
06:11.963 --> 06:18.569
[SPEAKER_00]: It's truly about the tax treatment and getting this high value yield into your portfolio.
06:18.990 --> 06:21.452
[SPEAKER_00]: Number two is portfolio income.
06:22.133 --> 06:43.418
[SPEAKER_00]: Your portfolio income comes from your financial investments, stocks, bonds, reats, any other type of private equity that does not qualify as passive income does not have that magic depreciation component because all of those types of investments are going to have different types of tax treatments.
06:44.098 --> 06:48.341
[SPEAKER_00]: You will have qualified dividends that are coming from certain investments.
06:48.721 --> 06:53.363
[SPEAKER_00]: Those will qualify for zero to twenty percent a nice capital gains rate.
06:54.144 --> 07:00.648
[SPEAKER_00]: You can also have your interest income that's taxed at ten to thirty seven percent an ordinary income tax rate.
07:01.408 --> 07:04.371
[SPEAKER_00]: Read distributions, taxes or narrow income.
07:04.471 --> 07:13.041
[SPEAKER_00]: The key thing to understand is from your portfolio income, you're not going to have the depreciation benefits that comes from the passive income.
07:13.521 --> 07:17.385
[SPEAKER_00]: What you earn is also going to have a higher tax rate.
07:18.306 --> 07:27.091
[SPEAKER_00]: So let's use the example of the REIT, the REIT you get fifty thousand dollars of income from a particular REIT investment.
07:27.551 --> 07:33.755
[SPEAKER_00]: But if it's taxed at ordinary rates, that could be as much as eighteen thousand five hundred dollars in taxes.
07:34.650 --> 07:34.830
[SPEAKER_00]: Right?
07:35.030 --> 07:41.311
[SPEAKER_00]: This is very different in what you're actually going to have flow to your bottom line.
07:41.611 --> 07:52.774
[SPEAKER_00]: When you compare portfolio income from passive income, it's different in the sense that you can have phenomenal investments that are continuing to grow, but it's going to be taxed as a higher rate.
07:53.234 --> 07:56.855
[SPEAKER_00]: So that's going to be qualified as portfolio income.
07:57.175 --> 07:57.435
[SPEAKER_00]: Okay.
07:57.535 --> 08:02.916
[SPEAKER_00]: Number three is your business income, active creation.
08:03.816 --> 08:07.657
[SPEAKER_00]: This is where most passive income gurus are actually operating.
08:07.677 --> 08:18.939
[SPEAKER_00]: This is business income that's coming from coaching, courses, YouTube channels, affiliate marketing, drop shipping, anything else that you actively create or manage.
08:19.379 --> 08:22.199
[SPEAKER_00]: This is the tax bracket that gets hit the hardest.
08:22.759 --> 08:31.681
[SPEAKER_00]: It could get hit with ordinary income rates, so that's ten to thirty-seven percent, or it could also have a self-employment tax on top of it.
08:32.531 --> 08:37.417
[SPEAKER_00]: You may also be hit with state taxes up to another thirteen percent depending on your state.
08:37.838 --> 08:45.648
[SPEAKER_00]: The key thing to understand is many of these are also going to be run as businesses and have some operating expenses to go against the revenue.
08:46.208 --> 08:49.352
[SPEAKER_00]: But ultimately if you have a fifty thousand dollar course
08:50.073 --> 09:00.718
[SPEAKER_00]: that everyone's calling passive income in California, if you generate fifty thousand dollars, you have very lean margins, you can pay over twenty six thousand dollars in taxes.
09:00.998 --> 09:03.339
[SPEAKER_00]: That's a fifty-two percent effective tax rate.
09:03.819 --> 09:07.160
[SPEAKER_00]: This is where I just want to be honest and talk about the truth.
09:07.200 --> 09:11.382
[SPEAKER_00]: Like this is not passive income in how the IRS defines it.
09:11.902 --> 09:17.565
[SPEAKER_00]: It's truly business income and the IRS taxes it exactly like a business.
09:19.055 --> 09:34.120
[SPEAKER_00]: So now that you have these three true passive income portfolio income and business income, let me show you side by side why precision matters, why these definitions in these words really mean something.
09:34.660 --> 09:48.753
[SPEAKER_00]: Okay, I want to now line these up and show you that when you compare the taxes against these, this is going to change your complete perception and get you focused in on what is true passive income.
09:49.634 --> 09:57.722
[SPEAKER_00]: So for this exercise, let's take the same fifty thousand dollars of income and see how much you actually keep under each category.
09:58.698 --> 10:01.541
[SPEAKER_00]: So, true passive income, right?
10:01.621 --> 10:04.764
[SPEAKER_00]: We are investing in some private equity real estate.
10:05.225 --> 10:09.950
[SPEAKER_00]: Gross income from that investment, the income we receive is fifty thousand dollars.
10:10.671 --> 10:13.293
[SPEAKER_00]: The depreciation deduction is forty thousand dollars.
10:14.094 --> 10:36.776
[SPEAKER_00]: taxable income is ten and we're in the twenty percent tax bracket which is two thousand dollars net income forty eight thousand dollars beautiful we made fifty thousand dollars we have in our bank account forty eight thousand dollars now let's compare this against real estate in the public market a portfolio income coming from a rate
10:37.605 --> 10:42.606
[SPEAKER_00]: gross income of fifty thousand dollars, fifty thousand dollars of taxable income.
10:42.626 --> 10:46.927
[SPEAKER_00]: But we're going to tax that as a thirty seven percent ordinary income rate.
10:47.427 --> 10:50.428
[SPEAKER_00]: That's eighteen thousand five hundred dollars of taxes.
10:51.148 --> 10:54.408
[SPEAKER_00]: And you're taking home thirty one thousand five hundred.
10:54.688 --> 10:57.509
[SPEAKER_00]: Now let's go to fifty thousand dollars of business income.
10:57.909 --> 10:59.650
[SPEAKER_00]: This is from coaching sales.
11:00.210 --> 11:02.170
[SPEAKER_00]: So you generate fifty thousand dollars.
11:02.650 --> 11:06.191
[SPEAKER_00]: You then have a self employment tax of seven thousand six hundred fifty.
11:07.151 --> 11:31.869
[SPEAKER_00]: and you have the thirty seven percent bracket or income bracket that's eighteen thousand five hundred you're walking home with twenty three thousand eight hundred fifty so this is exactly my point the same fifty thousand dollars but when you look at these categories of income passive income forty eight thousand dollars take home that's ninety six percent of that gross revenue you're taking home portfolio income
11:32.469 --> 11:36.610
[SPEAKER_00]: You're taking home sixty three percent of it or thirty one thousand five hundred dollars.
11:36.890 --> 11:46.313
[SPEAKER_00]: But what everybody calls passive income really isn't it's business income and you're taking home forty eight percent of that at twenty three thousand eight hundred fifty.
11:47.353 --> 11:55.235
[SPEAKER_00]: So this is why these gurus that are talking about passive income and reusing that term are doing you a disservice.
11:56.155 --> 12:05.564
[SPEAKER_00]: They're really calling business income passive when it's taxed at literally double the rate of true real passive income.
12:05.844 --> 12:10.849
[SPEAKER_00]: So what's important for you for my money managers that are managing tech millions?
12:11.070 --> 12:19.978
[SPEAKER_00]: If you understand these differences, then you structure your wealth building to prioritize the most tax efficient income streams.
12:20.839 --> 12:24.002
[SPEAKER_00]: First, this is what's going to give you the best benefit.
12:24.402 --> 12:34.891
[SPEAKER_00]: Now, let me explain why these words and why being precise with them matters when it comes to wealth building and architecting your microfamily office.
12:35.151 --> 12:43.318
[SPEAKER_00]: Let's start with what is the order of prioritizing these different types of income that are the best for smart wealth building.
12:43.998 --> 12:47.222
[SPEAKER_00]: Number one, maximize passive income first.
12:47.903 --> 12:59.618
[SPEAKER_00]: This is your real estate in private equity that comes with depreciation and meets the IRS requirement because you're getting high income and you're getting at very tax efficiently.
13:00.843 --> 13:03.946
[SPEAKER_00]: The second priority is they're going to be portfolio income.
13:04.446 --> 13:06.708
[SPEAKER_00]: You can actually keep investments growing.
13:07.108 --> 13:09.570
[SPEAKER_00]: You don't even need to make them taxable immediately.
13:10.030 --> 13:18.918
[SPEAKER_00]: But that is your diversified investments that have a better tax treatment than business income, but not as great as passive income.
13:19.618 --> 13:24.641
[SPEAKER_00]: Number three is scale business income strategically, right?
13:24.821 --> 13:31.466
[SPEAKER_00]: Know the tax cost of your business income and prioritize passive income and portfolio income first.
13:32.186 --> 13:45.395
[SPEAKER_00]: So when I restructured my micro family office, I prioritized my private equity investments, real estate investments that could generate passive income complemented with depreciation benefits.
13:46.477 --> 13:55.121
[SPEAKER_00]: I was then diversifying and growing my stock portfolio bond portfolio and other investments that didn't have his beneficial tax treatment.
13:55.782 --> 13:59.444
[SPEAKER_00]: This is what allowed me to truly replace my paycheck.
14:00.644 --> 14:07.688
[SPEAKER_00]: Now, the business income coming in from coaching and courses, that's funding the first two categories.
14:08.646 --> 14:17.348
[SPEAKER_00]: I continue to take any type of income I get from my businesses and I buy more of these assets that are going to generate true passive income.
14:17.888 --> 14:28.791
[SPEAKER_00]: Today, ninety-five percent of my paycheck replacement is coming from passive income investments that are tax-free or the taxes being deferred.
14:29.471 --> 14:34.312
[SPEAKER_00]: while I use the higher tax business income to buy more of these investments.
14:34.912 --> 14:47.694
[SPEAKER_00]: This is an important strategy call out is that I am architecting in building my micro-family office to generate not just from my generation, but for the next tax-efficient passive income.
14:48.895 --> 14:55.876
[SPEAKER_00]: The challenges that many people chase this highest gross return, but they don't consider the after tax returns.
14:56.879 --> 15:03.033
[SPEAKER_00]: A six percent passive income return might be a ten percent business income return after taxes.
15:04.036 --> 15:05.118
[SPEAKER_00]: You have to do the math.
15:06.211 --> 15:07.572
[SPEAKER_00]: So here's the framework, right?
15:08.052 --> 15:08.872
[SPEAKER_00]: Passive income.
15:09.033 --> 15:10.593
[SPEAKER_00]: That builds your foundation.
15:11.154 --> 15:14.015
[SPEAKER_00]: Lowest taxes, highest amount of income.
15:14.596 --> 15:19.358
[SPEAKER_00]: That is going to be your stable, your foundational level.
15:20.018 --> 15:25.081
[SPEAKER_00]: Then you have your portfolio income, providing diversification and liquidity.
15:25.521 --> 15:33.046
[SPEAKER_00]: Then you stack onto that, your business income that accelerates wealth building by buying more of the passive income.
15:33.066 --> 15:35.187
[SPEAKER_00]: It gets reinvested into the other two.
15:35.807 --> 15:41.028
[SPEAKER_00]: This is how you build generational wealth instead of just high tax income streams.
15:41.608 --> 15:45.049
[SPEAKER_00]: So here's how you take this framework and you start putting it into practice.
15:45.809 --> 15:54.231
[SPEAKER_00]: First and foremost, audit the current income that is coming from your micro family office, from all your sources of income, right?
15:54.311 --> 15:55.591
[SPEAKER_00]: And then you want to categorize them.
15:56.272 --> 15:59.832
[SPEAKER_00]: What do you have that's truly passive income with tax benefits?
16:00.453 --> 16:01.933
[SPEAKER_00]: Call that out and set that aside.
16:02.573 --> 16:06.176
[SPEAKER_00]: Then what is your portfolio income that you're getting from your investments?
16:07.457 --> 16:10.859
[SPEAKER_00]: Do you have business income that you're calling passive that's really not?
16:11.460 --> 16:12.721
[SPEAKER_00]: Allocate that appropriately.
16:12.741 --> 16:17.084
[SPEAKER_00]: And if for many of you, you're going to have W-II income as well.
16:17.444 --> 16:23.389
[SPEAKER_00]: And then you're also going to have income coming from your equity compensation categorized those appropriately.
16:24.389 --> 16:29.974
[SPEAKER_00]: Now calculate your real after tax returns on each of those different types of investments.
16:31.076 --> 16:38.361
[SPEAKER_00]: Don't just look at gross returns, make sure that you get real with yourself and understand what is the tax rate for each income type.
16:39.201 --> 16:42.543
[SPEAKER_00]: Where are depreciation benefits available that you can use?
16:43.284 --> 16:50.928
[SPEAKER_00]: Do you also need to make sure that you're applying self-employment taxes for business income if you're doing some consulting or you do have a side hustle?
16:51.328 --> 16:56.572
[SPEAKER_00]: And the key thing is to rebalance your strategy based on your analysis.
16:57.637 --> 17:07.084
[SPEAKER_00]: How do you prioritize building true passive income and generating paycheck replacement income that is tax-protected?
17:08.325 --> 17:13.650
[SPEAKER_00]: How do you then diversify with portfolio investments for liquidity and better tax treatment?
17:14.790 --> 17:26.780
[SPEAKER_00]: Then ultimately, how do you use whether it's your business income or it's your equity compensation to fund these other two categories so that you're building strategically your microfamily office?
17:28.143 --> 17:28.303
[SPEAKER_00]: Right?
17:28.363 --> 17:30.064
[SPEAKER_00]: For you as tech professionals, right?
17:30.405 --> 17:35.088
[SPEAKER_00]: You're high W to income automatically puts you in a top tax bracket.
17:36.029 --> 17:56.605
[SPEAKER_00]: But you can actually leverage passive income to get out of there by continuing to invest in assets that generate income that's tax protected because sometimes you only need a hundred and seventy five thousand dollars in tax protected income to replace two hundred and fifty thousand dollars in W to income.
17:57.205 --> 18:18.380
[SPEAKER_00]: The reality is that if you're generating significant business income, you can also really think about how do you structure it through your family office and different entities that can continue to invest in passive income opportunities that you're converting high tax business income into lower tax passive income over time.
18:19.321 --> 18:20.682
[SPEAKER_00]: This is how you play it with.
18:21.242 --> 18:23.263
[SPEAKER_00]: Here's what you need to do right now.
18:24.219 --> 18:26.980
[SPEAKER_00]: First, stop calling everything passive income.
18:27.581 --> 18:29.502
[SPEAKER_00]: Use the proper terminology.
18:30.142 --> 18:38.606
[SPEAKER_00]: Passive income for real estate and private equity that has depreciation benefits, we are not actively involved in the business.
18:39.587 --> 18:48.271
[SPEAKER_00]: Portfolio income is for all of your other financial market and private equity investments that don't have depreciation associated with it.
18:49.225 --> 18:53.287
[SPEAKER_00]: Then you have your business income, anything you actively create or manage.
18:54.027 --> 18:59.010
[SPEAKER_00]: And then in addition to that, you have your W-II income, anything you earn as a wage.
19:00.746 --> 19:02.707
[SPEAKER_00]: run the math on your current income streams.
19:03.347 --> 19:11.290
[SPEAKER_00]: You might discover that some of your highest performing investments are actually underperforming when it comes to taking home the dollars.
19:11.751 --> 19:16.833
[SPEAKER_00]: Rearchitect in structure you wealth building to maximize passive income first.
19:17.073 --> 19:26.797
[SPEAKER_00]: This is the foundational way of every micro family office that I work with is how do you flip the script and focus a hundred percent on tax protected income?
19:27.217 --> 19:32.478
[SPEAKER_00]: the precision and terminology and tax strategy is what we've built into wealth ops framework.
19:33.338 --> 19:42.980
[SPEAKER_00]: Wealth ops is not just about making money, it's about managing it and keeping more of it so that it's structured for long-term wealth from multiple generations.
19:43.500 --> 19:52.081
[SPEAKER_00]: The reality is the difference between a forty-eight percent tax rate and a four percent tax rate on the same income amount is not just math.
19:52.902 --> 19:54.982
[SPEAKER_00]: It's the difference between actually building wealth
19:55.786 --> 19:57.428
[SPEAKER_00]: and staying on the income treadmill.
19:57.868 --> 20:13.462
[SPEAKER_00]: If this level of precision and strategy resonates with you, hit subscribe right now because I'm going to continue making videos that are breaking down more advanced wealth management concepts, specifically for hiring tech professionals who work for equity income.
20:14.223 --> 20:28.006
[SPEAKER_00]: And if you really want to build generational wealth and you want to understand deeper of how to structure your portfolio like a business, I've encouraged you to think about attending our monthly live event, go to wealthops.live.
20:29.486 --> 20:33.927
[SPEAKER_00]: And I think the final takeaway is remember words matter, taxes matter more.
20:34.527 --> 20:39.948
[SPEAKER_00]: And the precision in both is going to determine whether you build wealth or just generate taxable income.
