What is Passive Income?

In the post on submitting photos online to ShutterStock and iStockPhoto, I claimed that revenue generated was passive income.  That was incorrect – income generated is actually residual income.  Many companies lay claim to earning passive income using their methods or systems.  I became curious and wanted to research and report accurately.  The U.S. Internal Revenue Service (IRS) has strict definitions for passive income as follows:

  • Passive income has only two sources:  net rental income and income from a business in which the taxpayer does not materially participate.
  • Interest, dividends, royalties, annuities and gains on stocks and bonds are not passive income.
  • Net rental income from property leased to a business where the taxpayer materially participates is non-passive and should not be reflect on Form 8582.
  • Income from land, whether leased land or property held for investment, is non-passive.  Stated differently, net income (but not net loss) from the leasing of nondepreciable property (such as land) is treated as non-passive.[i]

Royalties, for example, according to the IRS guide, are generally non-passive in nature.  Ditto for interest, dividends, annuities, and gains from stocks and bonds, lottery winnings, salaries, wages, commissions, retirement income, and guaranteed payments for services.

The next time a business claims to offer big passive income, perhaps an MLM or network marketing company, it is probably residual income, FYI.  Do your homework and consult a professional.

I am not an accountant, CPA, financial or tax expert in any way and do not claim expertise in any of the aforementioned areas.  Check with your tax professional for specific information about your own tax and financial situation.

Dion D. Shaw

Dion D. Shaw is the founder and owner of Homepreneurs


[i] http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Passive-Activity-Loss-ATG—-Chapter-3,-Passive-Income-

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