Passive income is an income received on a regular basis, with little effort required to maintain it.

The American Internal Revenue Service

Internal Revenue Service

The Internal Revenue Service is the revenue service of the United States federal government. The agency is a bureau of the Department of the Treasury, and is under the immediate direction of the Commissioner of Internal Revenue...

 categorizes income into three broad types, active (earned) income, passive income, and portfolio income. It defines passive income as income from "trade or business activities in which you do not materially participate." Other financial and government institutions also recognize it as an income obtained as a result of capital growth or in relation to negative gearing

Negative gearing

Negative gearing is a form of leveraged speculation in which a speculator borrows money to buy an asset, but the income generated by that asset does not cover the interest on the loan...

. Passive income is usually taxable

Taxable income

Taxable income refers to the base upon which an income tax system imposes tax. Generally, it includes some or all items of income and is reduced by expenses and other deductions. The amounts included as income, expenses, and other deductions vary by country or system. Many systems provide that...

.

Some examples of passive income are:

• Earnings from a business that does not require direct involvement from the owner or merchant;
• Rent
  Renting
  Renting is an agreement where a payment is made for the temporary use of a good, service or property owned by another. A gross lease is when the tenant pays a flat rental amount and the landlord pays for all property charges regularly incurred by the ownership from landowners...
  
   from property
  Property
  Property is any physical or intangible entity that is owned by a person or jointly by a group of people or a legal entity like a corporation...
  
  ;
• Royalties
  Royalties
  Royalties are usage-based payments made by one party to another for the right to ongoing use of an asset, sometimes an intellectual property...
  
   from publishing a book or from licensing a patent
  Patent
  A patent is a form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for a limited period of time in exchange for the public disclosure of an invention....
  
   or other form of intellectual property, such as computer software product;
• Earnings from internet advertisements on websites;
• Dividend
  Dividend
  Dividends are payments made by a corporation to its shareholder members. It is the portion of corporate profits paid out to stockholders. When a corporation earns a profit or surplus, that money can be put to two uses: it can either be re-invested in the business , or it can be distributed to...
  
   and interest
  Interest
  Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
  
   income from owning securities, such as stock
  Stock
  The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
  
  s and bonds
  Bond (finance)
  In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity...
  
  , is usually referred to as portfolio
  Portfolio (finance)
  Portfolio is a financial term denoting a collection of investments held by an investment company, hedge fund, financial institution or individual.-Definition:The term portfolio refers to any collection of financial assets such as stocks, bonds and cash...
  
   income, which may or may not be considered a form of passive income. In the United States, portfolio income is considered a different type of income than passive income;
• Pension
  Pension
  In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...
  
  s.

The IRS has a specific definition of passive income that excludes some of the incomes listed above. Royalties, for example, are, according to the Service guide, generally non-passive in nature. Additionally, interest, dividends, annuities, and gains from stocks and bonds, lottery winnings, salaries, wages, commissions, retirement income, guaranteed payments for services are considered by the IRS to be non-passive.

External links

• Passive income, Investopedia
• ASIC's MoneySmart website