Legal Definitions - passive activity

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.