Passive income tax rates run from 0% to 37% at the federal level, and which rate applies depends on what kind of income it is and how much you make overall. Rent and profits from businesses you don’t actively help run are taxed at ordinary rates of 10% to 37% for 2026. Long-term gains on passive assets and qualified dividends get preferential rates of 0%, 15%, or 20%. On top of either, higher earners can owe an extra 3.8% Net Investment Income Tax, and selling a depreciated rental triggers a separate 25% recapture rate on part of the gain.
What Counts as Passive Income for Tax Purposes
The IRS defines passive income narrowly. Only two categories qualify under federal tax law: rental activities, and businesses in which you don’t materially participate.1Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited A rental activity is any arrangement where payments are mainly for the use of tangible property, whether that’s an apartment, a warehouse, or equipment. A business is passive if you own an interest but fail all seven of the IRS’s material participation tests for the year.
Interest, dividends, and stock-market gains are not passive income in the IRS’s vocabulary. They are portfolio income, which follows its own rules.2Internal Revenue Service. Publication 550 (2024), Investment Income and Expenses The distinction matters most for losses: a rental loss generally can’t be used to reduce tax on your dividends or bond interest. But the rate schedules below apply to both categories, so the numbers cover everything most people are asking about when they search for passive income tax rates.
Ordinary Rates on Rent and Non-Participating Business Income
Rental income, income from a business where you don’t materially participate, short-term gains on passive assets held a year or less, and non-qualified dividends are all taxed at ordinary federal income tax rates. The 2026 brackets are:3Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
- 10%: up to $12,400 single, $24,800 married filing jointly
- 12%: $12,401 to $50,400 single, $24,801 to $100,800 joint
- 22%: $50,401 to $105,700 single, $100,801 to $211,400 joint
- 24%: $105,701 to $201,775 single, $211,401 to $403,550 joint
- 32%: $201,776 to $256,225 single, $403,551 to $512,450 joint
- 35%: $256,226 to $640,600 single, $512,451 to $768,700 joint
- 37%: over $640,600 single, over $768,700 joint
Passive income stacks on top of your other taxable income. If you earn $60,000 in wages and collect $20,000 in rent, the IRS applies the brackets to the combined $80,000.
No Self-Employment Tax
One quiet advantage: most passive income isn’t hit with self-employment tax. Rental income from real estate is specifically excluded from net earnings from self-employment, so long as you’re not providing substantial services to tenants beyond what a landlord customarily does. Income from a business in which you don’t materially participate is likewise excluded. That saves the 15.3% self-employment rate (12.4% Social Security plus 2.9% Medicare) that active business owners pay on the same dollars.
Long-Term Capital Gains and Qualified Dividend Rates
Sell a passive asset you’ve held longer than a year and the profit qualifies for preferential long-term capital gains rates rather than ordinary rates. For 2026:4Internal Revenue Service. Revenue Procedure 2025-32
- 0%: taxable income up to $49,450 single, $98,900 joint
- 15%: $49,451 to $545,500 single, $98,901 to $613,700 joint
- 20%: over $545,500 single, over $613,700 joint
Most filers land in the 15% band. The 0% rate is mainly a benefit for taxpayers with modest total income, such as retirees drawing mostly from investments.
Qualified dividends get the same preferential rates. To qualify, you have to hold the underlying stock for more than 60 days during the 121-day window around the ex-dividend date.5Legal Information Institute (LII) at Cornell Law School. 26 USC 1(h)(11) – Qualified Dividend Income Dividends that miss the holding period are taxed as ordinary income.
Depreciation Recapture When You Sell a Rental
Selling rental property triggers a rate that catches many owners off guard. Because the IRS makes you depreciate the building each year while you hold it, reducing your taxable rental income along the way, it also recaptures that benefit when you sell. The portion of your gain equal to the depreciation you took is taxed at a maximum rate of 25%, known as unrecaptured Section 1250 gain.6Internal Revenue Service. Topic No. 409, Capital Gains and Losses
An example: you bought a rental for $300,000, claimed $80,000 in depreciation over the years, and sold for $400,000. Your total gain is $180,000, calculated against the depreciation-adjusted basis of $220,000. The first $80,000 of that gain, matching the depreciation you claimed, faces the 25% recapture rate. The remaining $100,000 gets long-term capital gains treatment. Recapture sits between the top ordinary rate of 37% and the standard long-term rate of 15%, and it stacks with the Net Investment Income Tax where that applies.
The 3.8% Net Investment Income Tax
Higher earners owe an extra 3.8% surtax on passive and investment income under the Net Investment Income Tax. It applies to the smaller of your net investment income or the amount by which your modified adjusted gross income exceeds these thresholds:7Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
- Single or head of household: $200,000
- Married filing jointly: $250,000
- Married filing separately: $125,000
The thresholds aren’t indexed for inflation, so more taxpayers cross them each year. Net investment income for this purpose includes rent, dividends, interest, royalties, capital gains, and income from businesses in which you don’t materially participate.7Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax It does not include wages, self-employment income, or Social Security benefits.
How it plays out: a single filer with $180,000 in salary and $50,000 in rental income has modified AGI of $230,000. The NIIT applies to the lesser of the $50,000 in net investment income or the $30,000 above the $200,000 threshold. The surtax hits $30,000 at 3.8%, adding $1,140 to the tax bill. It’s reported on Form 8960.8Internal Revenue Service. Topic No. 559, Net Investment Income Tax
Combined Effective Rates by Income Type
Stacking the ordinary or capital gains rate with the NIIT and any recapture, here is what each type of income can actually cost in federal tax:
- Rental income: 10% to 40.8%
- Long-term capital gains on passive assets: 0% to 23.8%
- Qualified dividends: 0% to 23.8%
- Short-term gains and non-qualified dividends: 10% to 40.8%
- Depreciation recapture on rental property: up to 28.8% (25% plus 3.8% NIIT)
State Taxes on Top
State income tax can add anywhere from 0% to more than 13% on top of the federal figures above, depending on where you live. About eight states don’t tax individual income at all, and others tax rental and investment income at the same rates as wages.
One Note on Losses
The passive label doesn’t change the rate on income you actually earn; where it bites is losses. Passive losses can only offset passive income, not wages or portfolio gains, and any excess carries forward until you generate enough passive income to absorb it or sell your entire interest in the activity.9Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules That’s the trade-off behind the rate schedules above: preferential capital gains rates and no self-employment tax on one side, restricted loss deductions on the other.