Using IRA funds as loan to LLC

I am partners with 2 other guys in a LLC. Each partner owns 33% of this LLC. We have been buying foreclosures at the monthly auction and paying cash for them. We now have about 12 rentals that we own. One of the partner’s dad has quite a bit of money in an IRA and is not happy about the intertest rates he is getting on his investments. Is it possible for my partner’s father to loan our LLC money out of his IRA on the houses that we currently own free and clear? I have done some research about prohibited transactions, etc., but nothing I have read seems to be very clear. Thanks in advance for your help.

An IRA cannot invest in an entity where a principal is a lineal decedent.

Dad is only disqualified from investing in the LLC if disqualified persons own >50% of the LLC.

The question was whether Dad could loan money to the LLC.

If Dad is simply acting as a bank, loaning money and collecting market interest, is he really investing in the LLC?

Lending or owning are both (explicitly) treated the same.

If one son owns 33%, Dad can invest (as long as the other two are not related). Heck, if one son owns 33%, he himself can invest.

If two sons each own 33% for a total of 66%, Dad is disqualified.

If one son owns 25% and Dad owns 25%, Dad is disqualified.

This includes both direct AND indirect ownership (ie: being a partner in a partnership that is a member of the target LLC also counts).

If one son owns 25% and is a 50% partner in a partnership that is a 50% member, son then constructively owns 50% (25% direct + (50% of 50% indirect)) and Son and Dad are disqualified.

It’s not as cut and dry as 50%. There are some cases where the IRS ruled the transaction prohibited because one person had too much influence over both ends of the transaction, even though the ownership level was less than 50%.

My concern with this situation is that the son may have too much influence (regardless of actual ownership) and that could make the transaction prohibited. I don’t know how the IRS would rule if it ever came before them. Most likely, everything will be fine and there will be no problems.