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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 forms, 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 capital growth or in relation to negative gearing.
Passive income is different from earned income and portfolio income in a variety of ways. Passive income is generally defined as a flow of income earned little effort, and it's referred to as innovative passive income when there is little effort needed in the individual receiving the passive income in order to grow the stream of income.
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Passive income differs from active income that's defined as any earned income including each of the taxable income and salary the earner get from working. Linear active income describes one constantly needed to stay busy to maintain the flow of income, and once an individual chooses to quit working the income will probably even cease, examples of active income include wages, self-employment income, material participation in an s corp, or 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 such as Rental income and incoming cash flow from property or any piece of property, and interest in 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 may be considered passive as long as the limited partner does not have any role in the company and they exchange their funds investment in return for a share of the actions gain.
In order to be considered a rental activity, tangible property is used by clients and also the income paid from the action comes in the amount paid for the use of their house and is not considered a rental if:
"Earned Income vs Passive Income vs Portfolio Income: A Comparison - Only 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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