Passive Income

Passive income is income not earned from work. The term passive income implies that the income is from the cash flow generated by assets owned. Thus, royalties from books published would be considered passive income, but gifts from relatives would not. In taxation, a distinction is made between passive income and what is called portfolio income. Passive income is then defined as income from any trade or business or income-producing activity in which the taxpayer does not materially participate. Portfolio income is then defined as income not derived form a one’s trade or business. For instance, book royalties would be classified as passive income of the author, but portfolio income of the author’s heirs. Dividends from public company stocks owned would usually be considered portfolio income, but might be regarded as passive income for the founder of the company. The usual rationale for wealth accumulation is to have sufficient passive income to obviate the need to work. In this context, passive income is taken to mean both portfolio and passive income.