Active vs. Passive Income – Real Estate

Income is income, right? Not exactly, there are what are known as active income and passive income. Active income is money earned from traditional sources; hourly wages, salaries, commissions, tips, etc. Passive income is money that you earn without actively working for it. Examples of passive income include dividends from stocks, interest from savings accounts, and generally includes income earned from rentals.

According to IRS Publication 925, “A rental activity is a passive activity even if you materially participated in that activity unless you materially participated as a real estate professional.” Being a real estate professional means that you met both qualifications provided by the IRS

1. “More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated.”

2. “You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated.”

And finally, a real property trade or business is any business that; Develops or redevelops property, constructs, or reconstructs, acquires, converts, rents, leases, operates or manages, or brokers real property.

If you have questions regarding real estate and want to know more about Active and Passive Income, please reach out to the Professionals at The Center for Financial, Legal, & Tax Planning, Inc. at (618) 997-3436.