What is Portfolio Income?
For most investors, the ideal goal isn’t maximized total income, but maximized income that’s free of endless effort and largely exempt from taxation. Different sources of investment typically require an entirely different level of input – day trading of stocks, for example, is much more demanding on an investor than a long-term purchase. This can alter the ‘true value’ of any one form of investment.
Generally speaking, the most stable and versatile form of investment is a diverse portfolio of stocks, currencies, real estate, and other commodity-type investments. The diverse nature of this investment means that shifts in the market – such as the 2006 real estate market crash and latter subprime stock crash – are less likely to push an entire portfolio into the red than they would a focused investment.
This brief guide will discuss the definition of portfolio income, income earned across a portfolio of different investments; the benefits of this type of investment, both in terms of tax benefits and some of the ways in which it protects you from overall market dips, and the ways in which a newer stock investor can set up a portfolio of investments, allowing them to invest for the near or longer-term.
The term ‘portfolio income’ is loosely defined as any income resulting from investments in stock, such as dividends; licenses and intellectual property, which would produce royalty earnings, or an overall return from real estate investments such as rental income or sales profits. In general, all or any income from an investment is defined as portfolio income, and generally as one of three kinds.
Unlike earned income, which results from labor or a schedules salary, or passive income, which is earned from passive property or business investments, portfolio income is largely defined as being ‘paper’ income. This means that, despite showing an increase in value or net profit on paper, it’s not a source of ‘true’ financial income until it’s cashed out, either through an asset sale or investment.
Think of it this way – earnings on stock, or at least earnings outside of paid dividends – are defined as portfolio income. However, without the stock having been sold to realize the value of these gains, there’s no ‘real’ income as such. There’s a gain in equity that comes from the increase in value, but it is, at this point, limited to an increase in the value of the investment portfolio, not a cash increase.
If this portfolio income stems from an increase in the value of a property, it can be realized if the property is sold at its newer, higher value. If it’s in stocks, other than cash issued on dividends, it can be realized when the stock itself is sold at a higher value. Some investment expects claim that portfolio income is a ‘paper gain’ and merely speculation, at least until it’s turned into real cash.
Using our earlier real estate example, some of this portfolio income could be turned into cash by refinancing the property that’s gained value over time. This would free up cash in the short-term, allowing one to see some of the gains in value in real cash income. This can often assist in taxes related to property sales, which can be avoided through smart refinancing and alternate loans.
Other sources of portfolio income include capital gains – sales of stock in public companies that results in a net profit – and dividends received due to owning stock in a company over a lengthy term. In many cases, depending on the tax laws of a particular country or region, these forms of portfolio income may be exempt from excess taxes, resulting in greater earnings for investors.
There are even more sources of portfolio income, in fact. Interest gained from issued loans can be thought of as portfolio income, as a loan itself can make up part of an investment portfolio. Other types of portfolio income include franchise or business expansion earnings, which can be earned due to involvement in a franchise outlet, or equity holdings in a particular form of business.
Here’s the unfortunate truth about portfolio income, however. While many forms of investment are considered passive income for taxation purposes, most American investment portfolio holders won’t be able to classify their portfolio income as such. The IRS does not allow portfolio income to come under the ‘passive’ umbrella, which can produce an extra tax burden on many diversified investors.
Despite this, it’s very possible to get favorable tax rates on portfolio income with a diverse portfolio of investments and a skilled accountant. When dealing with anything related to tax, it’s essential that you speak with a professional and don’t take advice dished out online. Investment tax rates can end up being very different for different people – speak with a professional to find out your best options.
While ‘portfolio income’ can refer to a lot of different sources of income, it’s one that’s common for many investors. Whether based in sales, stock earnings, or equity in a company, portfolio income is a leading source of cash income for many people. With the right investment strategy, it’s very likely you can earn passively through a smart, sensible, and fairly diversified portfolio of investments.