What is taxable income derived from passive activities called?

Taxable income derived from passive activities is termed "passive income." This designation is significant because passive income typically comes from activities in which the taxpayer does not materially participate, such as rental real estate or limited partnerships. The Internal Revenue Service (IRS) classifies income as passive to distinguish it from active income, which is generated through participation in day-to-day business operations or employment activities.

Passive income has unique tax implications, particularly in how losses from passive activities are treated. These losses can usually only offset other income from passive activities, creating a specific tax liability scenario that doesn't apply to other income types. Understanding the differentiation is crucial for tax planning and ensuring compliance with IRS regulations, especially for individuals involved in investments or rental property management. This distinction highlights the importance of categorizing income properly to adhere to tax laws and optimize tax obligations.