What is the definition of passive income?

Passive income is typically defined as earnings derived from business activities in which an individual does not actively participate. This includes income earned from rental properties, which is generated without direct involvement in the day-to-day management of the property. As a result, the income received from these properties is characterized as passive because it comes from an investment rather than active work.

In contrast, wages and salaries stem from active employment, involving direct engagement and labor by the individual, making them non-passive. Similarly, income earned from self-employment is generated through the individual's direct actions in running their businesses, thus categorizing it as active income. Interest and dividends are also considered investment income; however, they usually fall under the broader category of unearned income rather than being explicitly defined as passive income related to real estate investments. Because rental properties provide a clear example of passive income, the selection indicating income earned from rental properties accurately captures the essence of passive income.