What to Know Before Partnering with Family Members in a Self-Directed IRA

It sounds like a great idea: you and a family member team up on a real estate deal using your self-directed IRAs. You both trust each other, you’re aligned on goals, and you want to build wealth together. But when the IRS is involved, even well-meaning decisions can backfire.

This is one of the most common areas where I see people unintentionally walk into prohibited transactions. So let’s talk through the rules and what you can do instead.

First, Who’s Considered “Family” by the IRS?

The IRS has a very specific definition when it comes to disqualified persons (people your IRA is not allowed to do business with). That includes:

• You (the IRA owner)
• Your spouse
• Your parents and grandparents
• Your children and grandchildren
• The spouses of any of the above

Notice who’s not on the list? Siblings, cousins, aunts, uncles—they aren’t considered disqualified by default. That doesn’t mean it’s automatically a good idea to partner with them, but it’s technically allowed.

More details here under IRS Publication 590-A.

What Makes a Transaction “Prohibited”?

Let’s say your IRA invests in a rental property, and your son is the property manager. That’s a problem. Your IRA can’t pay him, because he’s a disqualified person. If it does, the IRS could disqualify the whole account.

Or maybe you co-invest with your spouse’s IRA, and you each own 50% of the LLC. Seems fair, but if you or your spouse provides a service to that LLC, that’s self-dealing.

The IRS isn’t just watching who you partner with; it cares about what happens during the deal.

How to Partner the Right Way

If you want to partner with a non-disqualified person, say, a sibling or a friend, you still need to follow best practices:

• Create an operating agreement that clearly defines roles and capital contributions
• Avoid personally performing services (like managing the property)
• Don’t commingle personal and retirement funds

If you’re forming an LLC, it should be documented and treated like a real business, not a handshake deal.

Partnering within a self-directed IRA can work, but it’s full of landmines if you don’t know the rules. The key is keeping everything at arm’s length: professionally structured, fairly documented, and free of conflicts.

If you’re ever in doubt, talk to a tax advisor or IRA specialist. A little guidance now can save you a huge tax headache later.