Income property is a piece of real estate that generates positive cash flow for the owner of the real estate. Normally, it refers to investment property, or property that a person purchased solely to generate rental income. While it is most commonly used in commercial real estate, residential rental properties can also be income properties.
When a person buys a primary home, that home is an investment but it is not an income property, since it does not generate any positive cash flow. If a person buys a home to redecorate it and resell it, that also is not usually considered an income property, since its purpose is not to produce long-term passive income but instead to generate a return through a sale. Instead, most often when the term income property is used, it refers to a property purchased with the intent to hold it and receive passive income on a regular basis.
Any unit rented out can be considered an income property, since it is bringing money in each month, or at whatever frequency rents are collected. Thus, the person who owns the property receives an influx of cash on a regular basis simply because he owns the property. He does not have to do any additional work to obtain this passive income.
A second home rented to vacationers can thus be considered an income property, as can a 20-unit apartment building being rented out or a commercial building in which the owner rents out office space. There is thus a wide variety of levels of income properties. Sophisticated real estate investors usually have multiple properties producing income at any given period.
Although any property that has money coming in is considered an income property, not all properties actually generate positive cash flow for the owner. For example, if a property brings in $12,000 US Dollars (USD) per month in rent but the mortgage and operating expenses are $13,000 USD, then the owner of the property has income coming in each month but he does not have positive cash flow from the property.
Rental income from income-producing properties is taxable. Within the United States, the income is taxed as 1099 rental income. Certain expenses, such as depreciation on the property and required maintenance and repairs, can be deducted as long as certain conditions are met.