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Passive income is income resulting from cash flow obtained on a regular basis, requiring minimal to no attempt by the recipient to maintain it.
The U.S. Internal Revenue Service categorizes income into three broad types, active income, passive income, and portfolio income.1 It defines passive income as only coming from two resources: rental activity or"exchange 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 consequence of funding growth or in relation to negative gearing.
Passive income differs from earned income and portfolio income in a variety of ways. Passive income is generally defined as a stream of income earned with little effort, and it's referred to as progressive passive income when there is not much effort needed from the individual receiving the passive income in order to grow the stream of income.
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Passive income is different from busy income which is defined as any earned income including all the taxable income and wages the earner get from working. Linear active income refers to one constantly needed to remain busy to maintain the stream of income, and once an individual chooses to stop working the income will also stop, examples of active income include salary, 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 profits from ownership of capital, rent from ownership of resources like Rental income and incoming cash flow from home or any piece 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, music, video) owned by the licensor.
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Forms of limited partnerships might be considered passive so long as the limited partner does not have any function in the company and they exchange their own capital investment in return for a share of the activities profit.
In order to be considered a rental activity, tangible property is used by customers and the income paid out of the activity comes from the amount paid for the use of the property and is not considered a rental if:
"Earned Income vs Passive Income vs Portfolio try these out Income: A Comparison - Just Ask Ben Why". Just Ask Ben like it 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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