Legal Definitions - passive investment income

Passive investment income refers to earnings generated from investments where the recipient is not actively involved in the day-to-day operations or management that produces the income. This type of income typically flows from assets that appreciate in value or generate returns over time, requiring minimal ongoing effort from the owner.

It stands in contrast to "active income," which is earned from direct participation in a trade or business, such as a salary, wages, or profits from a business where the owner is actively involved.

Here are some examples to illustrate passive investment income:

• Example 1: Rental Income from a Managed Property

  Imagine Sarah owns a small apartment building but lives in another state. She hires a property management company to handle all aspects of the building, including finding tenants, collecting rent, performing maintenance, and addressing any issues. Sarah receives a monthly check representing the net rental income after the management fees and expenses are paid.

  This is passive investment income because Sarah is not actively involved in the day-to-day management of the property. Her income is generated from her ownership of the asset (the apartment building) and the work performed by others, requiring minimal ongoing effort from her.

• Example 2: Dividends from Publicly Traded Stocks

  David invests in shares of several large, publicly traded companies through his brokerage account. These companies periodically distribute a portion of their profits to shareholders in the form of dividends. David simply holds the shares and receives these payments without needing to participate in the companies' operations or make daily trading decisions.

  This qualifies as passive investment income because David earns money from his ownership stake in the companies without actively working for them or managing their business. The dividends are a return on his capital investment.

• Example 3: Interest from a Certificate of Deposit (CD)

  Maria deposits a sum of money into a Certificate of Deposit (CD) at her bank. The CD has a fixed interest rate and a specific term, during which Maria agrees not to withdraw the funds. At the end of the term, Maria receives her initial deposit back along with the accumulated interest.

  This is passive investment income because Maria earns interest simply by allowing her money to be held by the bank for a set period. She performs no active work to generate this income; it is a return on her capital investment.