Passive Activity and Portfolio Income
A person income is split into 3 categories by the IRS:
- activity (e.g., employment income)
- passive activity (e.g., real estate rent, royalties)
- portfolio income (e.g., stock and bond investments)
Those 3 categories were defined in the 80s with the purpose of making it harder for an individual to claim relief from employment income due losses in investment.
In particular, real estate based schemes were designed and marketed with such depreciation and interest payment that they would generate operating losses with relative predictability and sold to the highest bracket income earners.
