Passive income is earnings derived from a rental property, limited partnership or other enterprise in which a person is not actively involved. As with non-passive income, passive income is usually taxable. However, it is often treated differently by the Internal Revenue Service (IRS). In business, you can earn active or passive income. Active income occurs when you perform work that brings in money. Passive income is paid to you based on something you own. A good example of passive income is rent payments from rental property you own.
Passive income creates tax implications for you. Rental Income and Expenses (If No Personal Use of Dwelling) . Net investment income may include rental income and other income from passive activities. You are a cash basis taxpayer if you report income on your return in the year you actually or constructively receive it, regardless of when it was earned. In order to qualify for the Earned Income Credit, you must have earned income. Rental income is considered unearned income. It helps to think of earned income as money you work for, as opposed to passive income like interest, dividends, or rental income if you're not in the business of renting out properties. IRS rules regarding rental income are pretty generous, but landlords must keep excellent records.