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Active Income
Income earned through active work, such as wages, salaries, or business income from material participation.
Definition
Active income includes wages, salaries, commissions, and business income earned through material participation. The IRS treats active income differently from passive income for tax purposes — passive losses from rental properties generally cannot offset active income. This distinction matters enormously for real estate investors because depreciation and other rental losses are typically trapped in the passive category. The exception is for taxpayers who qualify as Real Estate Professionals, which allows them to reclassify rental income and losses as non-passive. Understanding the active vs. passive income distinction is critical for tax planning around your real estate portfolio.
Related Terms
Passive Income
Income from rental properties or businesses in which the taxpayer does not materially participate.
Real Estate Professional Status
An IRS designation allowing real estate losses to offset active income by meeting specific hour requirements.
Passive Activity Rules
IRS rules that limit the ability to deduct losses from passive activities against non-passive income.
Self-Employment Tax
The Social Security and Medicare tax that self-employed individuals pay on their business income.
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