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Passive income is income resulting from cash flow obtained on a regular basis, requiring minimal to no effort by the recipient to maintain it.
The U.S. Internal Revenue Service categorizes income into three broad forms, active income, passive income, and portfolio income.1 It defines passive income as only coming from two resources: rental action or"trade or business activities in which you do not materially participate. "23 Other financial and government institutions also recognize it as an income obtained as a result of capital growth or in relation to negative gearing.
Passive income differs from earned income and portfolio income in an assortment of ways. Passive income is generally defined as a stream of income earned with little effort, and it is referred to as progressive passive income when there is not much effort needed in the individual receiving the passive income in order to grow the flow of income.
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Passive income is different from active income which is defined as any earned income including all the taxable income and wages the earner gain out of working. Linear active income describes one constantly needed to remain active to maintain the stream of income, and once an individual chooses to stop working the income will also stop, examples of active income include wages, self-employment income, substance participation in an s corp, or even a partnership.4 portfolio income is derived from investments and includes capital gains, interest, dividends, and royalties.5.
Any kind of cash flow property income that includes earnings from ownership of funds, rent from ownership of resources such as Rental income and incoming cash flow from home or any bit of property, and interest from owning financial assets.6
Royalties are payments made by one company (the licensee) to another company or person (the licensor) in exchange for the right to use intellectual property (book, audio, video) owned by the licensor.
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Forms of limited partnerships might be considered passive as long as the limited partner does not have any role in the company and they exchange their capital investment in return for a share of the activities gain.
In order to be considered a rental activity, tangible property is used by customers and also the income paid out of the action comes from the amount paid for using the property and is not considered a rental if:
"Earned Income vs Passive Income vs Portfolio Income: A Comparison - Just Ask Ben Why". Just Ask Ben Why. 2015-06-22. Retrieved 2018-05-12.
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a b "Publication 925 (2017), Passive Activity and At-Risk Rules Internal Revenue Service". www.irs.gov. Retrieved 2018-05-12.
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