Tom's Blog

My friend, Billie, has a situation she would like some help with. Here is her question:

Q: Tom, I am permanently disabled from employment for the last 20 years. I am also a new coaching participant in Rich Dad's Real Estate Investor program. I understand that rental income and capital gains are not earned income. My former assets were liquidated over the past few years to fund a life/death legal and medical situation for my young daughter. I am seeking the parameters of types of deals and entities that I may engage in without needing to claim earned income. Any earned income claims will jeopardize my disability income. Because I had to liquidate my previous holdings, I need to construct a plan that will help me generate some cash flow to have some amounts to begin investing again. The types of deals that involve putting deals together for other people seem to be "earned income" activities. Do you have any suggestions about how to proceed in my planning process? As I understand my position, I must either choose only deals that will be "investment income" or find a way to create an entity or structure that will protect me from challenges to disability. The injuries were from a closed head injury, requiring relearning walking, talking, and constantly making compensations for residual cognitive and physical challenges which make regular "E" sector work non-viable for me. Thanks for your thoughts, Billie .

A: There are lots of ways you can create income without it being "earned income" that makes you lose your disability benefits. First of all, any investment you make into a business where you do not participate in the management and/or operations of the activity is a passive activity. Passive income is not earned income. For example, if you were to invest in a real estate development and your only role was to invest cash into the deal, your income from the deal would be passive and not earned income so long as the investment is through a limited liability company or a limited partnership or an S corporation or C corporation.

Really, the only investment that would produce earned income is one where you devote a considerable amount of time (typically 500 hours per year or more) and you are a general partner AND it's not real estate rental. If you are devoting time to this, it becomes a little more complex and we probably need to talk about it 1-1.

Please call our office at 866.467.5809 if you have additional questions or you want to devote your time and efforts to an investment and still received "unearned" income. There is always a solution to any tax issue.

Warmest regards,

Tom