Intuit Income Tax 2 Practice Exam

The concept of passive activity primarily refers to activities in which individuals do not materially participate in the business operations. Rental income is typically classified as passive income, especially if the individual does not actively participate in managing the property on a regular and continuous basis.

In the case of rental income, it is considered passive by default unless the individual is a real estate professional, in which case they might materially participate in the management and operations of the rental properties. The nature of earning rental income usually involves receiving payments from tenants without engaging actively in day-to-day management, meeting tenants, or handling property maintenance tasks. This hands-off approach firmly categorizes rental income as passive, according to IRS guidelines.

The other activities listed involve varying degrees of active participation. Running a business involves direct engagement and management, which would exclude it from passive activity. Interest from savings accounts is generally classified as portfolio income, not passive. Similarly, freelance work implies active involvement in providing services and earning income from personal effort, which also falls outside the definition of passive activities.