Passive income taxed??

[Marvin Romero]

Hey guys, I have a two part question 1. Is passive income not taxed because it isn't earned income??? Or why is it tax free? 2. If you have a rental that is producing passive income. And you sell it, do you owe taxes on the passive income when you sell? I have a friend who said that happened to them so I was wondering what is the case? Thanks BP!

[Ned Carey]

You absolutely do pay taxes on passive income. The advantage of passive income vs earned income is you do not have to pay Social Security tax on it. Also if the passive income comes from real estate there may be depreciation loss that compensates for the income. 

It is the depreciation that can save you taxes. However when you sell you do recapture the gains from depreciation.