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Passive Income
Income from rental properties or businesses in which the taxpayer does not materially participate.
Definition
Passive income, as defined by the IRS, is income from rental activities or businesses in which the taxpayer does not materially participate. Rental income is generally classified as passive regardless of how involved the landlord is, with the exception of those who qualify for Real Estate Professional Status. Passive losses from one rental property can offset passive income from another, but they generally cannot offset active income (like W-2 wages) unless the taxpayer meets specific income or participation thresholds. The $25,000 special allowance permits some rental losses for taxpayers with modified AGI under $150,000. Understanding the passive income rules is essential for maximizing the tax benefits of real estate investing.
Related Terms
Active Income
Income earned through active work, such as wages, salaries, or business income from material participation.
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.
Depreciation
A tax deduction that accounts for the wear and tear of a property over its useful life.
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