What type of income is categorized as coming from rental properties?

Rental income is categorized as passive income because it is typically generated from properties that the owner does not actively manage on a day-to-day basis. This means that once the rental property is purchased, the owner can earn money through the rent paid by tenants without being actively engaged in the business of renting out spaces, assuming they are not directly involved in managing the property.

Passive income streams commonly involve investments where the owner does not continuously work to generate revenue, which aligns perfectly with how rental properties function. In a real estate context, this income is often considered passive, especially if the property owner employs a property management service to handle the day-to-day operations.

Understanding the characteristics of passive income is crucial for investors, particularly in real estate, as it helps in tax planning and strategy formation. Moreover, distinguishing passive income from active income—where individuals are directly involved in generating income through their efforts—helps clarify the different types of revenue streams one might experience in real estate investments.