What is considered "passive income"?

What is considered "passive income"?

• A. Income from wages and salaries
• B. Interest and dividend income
• C. Income derived from rental activities
• D. Income from consulting work

Answer: (C)

Passive income is defined as income earned from activities in which the individual is not actively involved on a regular basis. This concept is crucial for understanding how different income sources are categorized in tax terms. Income derived from rental activities fits this definition, as it typically involves earning money from property that one owns without having to engage in the day-to-day management or operational activities related to that property. Even if the owner may be involved occasionally, rental income is primarily considered passive because the effort required to generate that income is less than that associated with active trades or businesses. In contrast, earned income from wages, salaries, or consulting work is classified as active income because it necessitates ongoing, substantial involvement. Interest and dividend income are often categorized as portfolio income, which is distinct from passive income derived from businesses or property rental. This distinction helps in understanding how different types of income are treated for tax purposes.

Passive income is defined as income earned from activities in which the individual is not actively involved on a regular basis. This concept is crucial for understanding how different income sources are categorized in tax terms.

Income derived from rental activities fits this definition, as it typically involves earning money from property that one owns without having to engage in the day-to-day management or operational activities related to that property. Even if the owner may be involved occasionally, rental income is primarily considered passive because the effort required to generate that income is less than that associated with active trades or businesses.

In contrast, earned income from wages, salaries, or consulting work is classified as active income because it necessitates ongoing, substantial involvement. Interest and dividend income are often categorized as portfolio income, which is distinct from passive income derived from businesses or property rental. This distinction helps in understanding how different types of income are treated for tax purposes.