What is Passive Income? | Definition (2024)

FAQs

What is the meaning of passive income? ›

Passive income is money that you don't have to actively work for; it comes in from something that already exists and continues to work for you. While active income is earned by working a job or owning a business, passive income is earned without having to work too much for it on an ongoing basis.

Passive income is often described as earning money with minimal effort. This usually means earnings from investments, like an Airbnb rental property, dividends, interest on savings, or leasing equipment.

Generally speaking, passive income is taxed the same as active income. However, the exact tax treatment will depend on the exact source of your passive income and your financial situation as a whole.

There are two kinds of passive activities. Trade or business activities in which you don't materially participate during the year. Rental activities, even if you do materially participate in them, unless you're a real estate professional.

Passive or unearned income is the other side of the “active or earned income” coin, which is income you receive from a job or business venture that requires active participation. As with active income, passive income is taxable.

In general, passive income is taxed the same way as active income. However, the difference becomes important when you experience passive income losses. If you lose money, you can't deduct your losses incurred in passive income from gains made through active income sources. Internal Revenue Service.

A stock portfolio focused on dividends can generate $1,000 per month or more in perpetual passive income, Mircea Iosif wrote on Medium. “For example, at a 4% dividend yield, you would need a portfolio worth $300,000.

The IRS has specific definitions for passive income

For tax purposes, true passive income activities are either 1) “trade or business activities in which you don't materially participate during the year” or 2) “rental activities, even if you do materially participate in them, unless you're a real estate professional.”

Inheritances, gifts, cash rebates, alimony payments (for divorce decrees finalized after 2018), child support payments, most healthcare benefits, welfare payments, and money that is reimbursed from qualifying adoptions are deemed nontaxable by the IRS.

Is social security passive income? ›

While you don't have to work for your monthly Social Security checks, you did have to work to establish your Social Security benefit, so there's a bit of gray area here. But in many ways, Social Security and other retirement income sources like pensions can be considered passive income for most practical purposes.

Ideas like renting out your RV, renting a room in your house, and making online printables are ideas for how to make an extra $500 a month in passive income. You will have to invest some of your time or money to get started, but that's the case with any kind of passive income stream.

When you have passive income, you're no longer solely dependent on your active income to cover for your living expenses. Passive income sources let you profit whether you're employed or not. Some passive income types can be lucrative, such as renting out properties you own where tenants are required to pay you monthly.