Definition

Passive income (also known as residual or recurring income) is commonly used to refer to income that continues to be earned even after the work is done. Passive income is earned by creating or acquiring an asset that continues to generate profit after active work on the asset has finished. Passive income may be treated differently by the Internal Revenue Service for tax purposes.

By contrast, active income is earned as a direct result of our work meaning input is correlated to output. Active income is commonly earned in the form of wages and salaries.

Passive Income Examples

A few examples of ways to earn passive income:

  • Royalties from the sale of a book or song
  • Income from the ownership of a real estate investment property
  • Proceeds from renting a spare room on AirBnB
  • Investing in loans through a platform like Lending Club or Prosper
  • Dividends earned from owning stock in a company
  • Stock photography royalties

Related Terms

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