Passive income is earnings derived from a rental property, limited partnership, or other enterprise in which a person is not actively involved. As with active income, passive income is usually taxable, but it is often treated differently by the Internal Revenue Service (IRS).
Understanding Passive Income
Passive income is typically taxable income. However, it is often treated differently by the IRS. Passive income, for the purposes of taxation, is defined as either “net rental income” or “income from a business in which the taxpayer does not materially participate.”
How Passive Income Works
Passive income streams require an upfront investment and a lot of nurturing in the beginning. After some time and hard work, these income streams start to build and are able to maintain themselves, bringing you consistent revenue without much effort on your part.
Types of Passive Income
There are three primary types of passive income: active, portfolio, and residual.
Active Income vs. Passive Income
Passive income can be generated through different activities, requiring varying levels of effort. For instance, rental income from real estate is a commonly cited form of passive income, as is income from certain business investments.
Portfolio Income vs. Passive Income
Passive income is different from portfolio income, which is income derived from investments, such as dividends, interest, and capital gains.
