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Why does rental income get taxed if it is considered passive income?

Passive income has only two sources: net rental income and income from a business in which the taxpayer does not materially participate. - https://www.irs.gov/pub/irs-mssp/pal.pdf 

 

I searched on google that apparently rental income tax is about 20%, which confusing me because I thought passive income couldn't be taxed.

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Why does rental income get taxed if it is considered passive income?

I expect you might have gotten confused in your Google search, (or simply got bad information), because there's not doubt at all that passive income can be taxed.  However, it doesn't work in reverse: if you have net passive losses you can't use those to your benefit, at least not until you sell whatever investment is throwing off those losses.   Passive losses can only be "used", (absent the sale of the investment), against offsetting passive income. 

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4 Replies
Anonymous
Not applicable

Why does rental income get taxed if it is considered passive income?

general federal tax rule  -  all income is taxable unless excluded by law. 

see code section 61

rent specifically (a)(5)

partnerships specifically (a)(12)

there is no tax law excluding passive income

 

the actual maximum tax rate on rental income can exceed 40%  + state taxes.  

 

For items specifically excluded from gross income, see sec. 101 and following

 

 

 

 

    

 

 

 

 

jtax
Level 10

Why does rental income get taxed if it is considered passive income?

@Anonymous's is referencing sections of the Internal Revenue Code, the text of the tax laws passed by Congress. Section 61 is at 

https://www.law.cornell.edu/uscode/text/26/61

 

The basic point is that all income is taxed unless there is a specific exception.

 

There is a thing about passive losses not being allowed in some circumstances. That is in IRC 469.

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Why does rental income get taxed if it is considered passive income?

I expect you might have gotten confused in your Google search, (or simply got bad information), because there's not doubt at all that passive income can be taxed.  However, it doesn't work in reverse: if you have net passive losses you can't use those to your benefit, at least not until you sell whatever investment is throwing off those losses.   Passive losses can only be "used", (absent the sale of the investment), against offsetting passive income. 

Why does rental income get taxed if it is considered passive income?

Thank you, I was watching a video on the guy who wrote rich dad poor dad. He said good luck taxing rich people they dont have jobs, they have assets like real estate generating passive income for them. He said there is 3 types of income. 

1. Job income

2. Income from selling something

3. Passive income

And he said passive income doesnt get taxed therefore "good luck taxing rich people".

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