You collect passive income from certain businesses in which you aren't an active participant.
They may include limited partnerships where you're a limited partner, rental real estate that you own but don't manage, and other operations in which you're an investor but have a hands-off relationship.
For example, if you invest as a limited partner, you realize passive income or passive losses because you don't participate in operating the partnership and have no voice in the decisions the general partner makes.
In some cases, income from renting real estate is also considered passive income. On the other hand, any money you earn or realize on your investment portfolio of stocks, bonds, and mutual funds is considered active income. That includes dividends, interest, annuity payments, capital gains, and royalties.
Any losses you realize from selling investments in your portfolio are similarly active losses.
Internal Revenue Service (IRS) regulations differentiate between passive and active income (and losses) and allow you to offset passive income only with passive losses and active income with active losses.
- Browse Related Terms: Blind pool, Hard assets, Hedge fund, Limited partner, Limited partnership, Passive income, Passive losses, Private equity, Real Estate, Venture capital (VC)