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Passive income is income resulting from cash flow received 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"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 result of capital expansion 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 with little effort, and it is referred to as progressive passive income when there is little 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 busy income which is defined as any earned income including all the taxable income and wages the earner gain from working. Linear active income refers to one constantly needed to stay active to maintain the stream of income, and once an individual chooses to stop working the income will even cease, examples of active income include salary, self-employment income, material 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 funds, rent from ownership of resources such as Rental income and incoming cash flow from home or any bit of real estate, 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, movie ) owned by the licensor.
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Types of limited partnerships might be considered passive so 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 profit.
In order to be considered a rental activity, tangible property is used by customers and the income paid from the activity comes from 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". Only 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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