> The property (which is usually what they really wanted) is forked off to a different entity, and then that entity charges rent back to the original corp. Th

> The property (which is usually what they really wanted) is forked off to a different entity, and then that entity charges rent back to the original corp. The IRS treats the owner’s basis in an entity differently based on being a business or passive activity. Included in basis for a passive investment is both recourse and nonrecourse debt, while the basis in a business such as a newspaper takes into account the recourse debt. If the business and passive activity are not separated, then if the owners refinance the asset with non recourse debt and distribute additional proceeds, it is a capital gain since the non recourse debt does not increase each partner’s basis. However, if you separate the business activity and passive activity, then the partners can include all the non recourse debt in their basis, and any distribution from refinancing would not be taxable. This is why you typically want your real estate to be a separate entity collecting rent from the entity operating the business.