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It was my understanding that any real estate that goes into a 401k could not have a mortgage. Could you go into this a little?

Without doing additional research (it's Monday and I'm back to work), I don't think there would be any significant differences between a 401k and an IRA, unless there is something specific in IRC section 401(k) about real estate. I'm fairly sure the UBTI issues would apply equally to a 401k and an IRA. So that may be where you got your understanding. Sometimes it's easy to think you can't do something, when the reality is that you can, but you really shouldn't.

As to the rest of your question - you're getting into the grey areas. The transactions between the IRA and the LP smell like they could be prohibited transactions. Specifically, they sound like buying from and selling to your IRA. It also sounds like you (and your brother - he's too close a family member) wouldn't be able to use the property.

If you really wanted to do something like this, I'd heartily recommend getting a Private Letter Ruling. The consequences of being on the wrong side of the law are pretty severe.

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