What constitutes "passive income"?

Passive income primarily refers to earnings derived from ventures in which an individual does not actively engage. This definition encompasses income generated from investments in rental properties or business activities where the taxpayer is not significantly involved in day-to-day operations or decision-making processes.

Specifically, rental income is a classic example of passive income, as landlords typically do not actively manage every aspect of their properties. Instead, they may hire property management services or rely on tenants to handle the routine activities associated with renting a home or commercial space. Likewise, investments in certain types of businesses, where the investor is a silent partner or shareholder without daily operational responsibilities, also fall under this category.

Thus, passive income is characterized by the idea that it requires minimal effort from the recipient after the initial time or capital investment, distinguishing it from active forms of income, like salaries or self-employment earnings, where continual engagement and work are mandatory.