What does the IRS primarily classify income earned from rental properties as?

The IRS primarily classifies income earned from rental properties as passive income. This classification is based on the nature of the activities involved in generating this income. Passive income is derived from rental activities in which the taxpayer does not materially participate. In most cases, this means that individual landlords earn income without being involved in day-to-day management or operations of the rental property.

This classification serves specific tax purposes, especially in determining eligibility for certain tax deductions and the treatment of losses from rental activities. Understanding this classification is crucial for property owners as it affects how they report income on their tax returns and the implications it has on their overall tax strategies.

Comparatively, the other classifications, such as active income, investment income, and ordinary income, apply to different types of earnings or activities that require a more direct involvement or different tax handling. Active income typically involves participation in a business or employment, while investment income is associated more with dividends, interest, and capital gains from investments. Ordinary income refers to wages or salaries that are taxed as standard income.