Passive Income - Explained
What is Passive Income?
Written by J. Mance Gordon
Updated at April 17th, 2024
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What is Passive Income?
Passive income is the earnings obtained from limited partnership, rental property, or other enterprise where a person is not involved actively. This income is usually taxable, like active income. However, Internal Revenue Service (IRS) sometimes treats it differently. Portfolio income is also taken as passive income by few analysts, so interest and dividends would will also be considered passive.
How Does Passive Income Work?
Income is broadly categorized into three key categories: active income, passive income and portfolio income. Passive income is less used term nowadays. Colloquially, its mostly applied to define money being earned on a regular basis with no or little effort on the part of the person getting it. Popular kinds of passive income are peer-to-peer (P2P) lending, real estate, and dividend stocks. The passive income earners are usually the boosters of a work-from-home and bear be-your-own-boss lifestyle. The kinds of earnings people generally associate with this are profits stocks, peer-to-peer (P2P) lending retirement pay, lottery winnings, online work and capital gains. While these earnings well define passive income, they still are not close to the technical definition given by IRS. Passive income, being used in a technical term, is either "income from the business wherein the taxpayer does not participate materially," or "net rental income" or and in certain cases can be self-charged interest. It can be said that passive income is not salaries, investment or portfolio income."