Passive income is more or less what it sounds like: income generated without the active involvement of the recipient. The term usually refers to income from rental property, but it can also include income from royalties, residuals, patents and licensing agreements. Proceeds from a vending machine are passive income; so is the rent from a basement suite.

It usually involves an initial outlay of time or money and continues to generate a return without further investment. However, passive income excludes interest, dividends and capital gains, all of which are considered portfolio income. For tax purposes, losses from passive income cannot be offset against other types of income.

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