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Simple English definitions for legal terms
passive activity
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A quick definition of passive activity:
Passive activity refers to a type of business activity where the person who owns it does not actively participate in it. This means they do not have immediate control over the income that comes from it. A common example of passive activity is when someone owns a property and rents it out, but they are not in the business of buying and selling properties.
A more thorough explanation:
Definition: Passive activity refers to a business activity in which the taxpayer does not actively participate and therefore does not have immediate control over the income.
For example, if someone owns a rental property but is not actively involved in managing it, then the income generated from that property is considered a passive activity. This is because the owner is not actively participating in the day-to-day operations of the rental property.
Another example of a passive activity is investing in stocks or mutual funds. The investor does not have any control over the management of the company or fund, and therefore the income generated from these investments is considered passive.
These examples illustrate the definition of passive activity because in both cases, the taxpayer is not actively involved in the business activity and does not have immediate control over the income generated from that activity.