Legal Definitions - passive income

Passive income refers to earnings derived from an enterprise or investment in which an individual is not actively or materially involved on an ongoing basis. Unlike active income, which typically comes from wages, salaries, or a business where one regularly participates, passive income often requires an initial investment of time or capital but then generates revenue with minimal continued effort.

Here are some examples illustrating passive income:

• Example 1: Rental Property
  Sarah purchased a small condominium unit and rents it out to tenants. She hired a property management company to handle all tenant inquiries, maintenance, and rent collection. Each month, after the management fees are deducted, Sarah receives a direct deposit of the remaining rental income into her bank account.

  This is passive income because Sarah's earnings come from her investment in the property, but she is not actively working to generate those monthly payments. The income flows in with minimal ongoing effort on her part, as the property management company handles the active tasks.

• Example 2: Stock Dividends
  Michael invested a significant sum in a diversified portfolio of publicly traded companies that regularly pay dividends to their shareholders. Every quarter, he receives a payment representing a portion of the companies' profits, which is automatically deposited into his investment account.

  This illustrates passive income because Michael's earnings are generated purely from his initial capital investment in the stocks. He does not need to perform any work or actively manage the companies to receive these regular payments; the income is a return on his investment.

• Example 3: Royalties from Intellectual Property
  Dr. Anya Sharma, a retired scientist, developed a unique software algorithm years ago and licensed it to a technology company. Under their agreement, she receives a percentage of the revenue generated by the software's sales each year.

  This is passive income because Dr. Sharma's earnings are a result of her past intellectual effort in creating the algorithm. While the initial development required significant work, she now receives income from its continued use and sales without needing to perform any new or ongoing work related to the software's operation, marketing, or maintenance.