Who Is a “Disqualified Person” in a Self-Directed IRA?

The List Looks Simple Until the Math Gets Involved

Ask most investors who counts as a disqualified person, and they’ll get the basics right: yourself, your spouse, your kids. What trips people up isn’t the simple list. It’s the entity ownership rules, where percentages from multiple people get added together in ways that aren’t always obvious until you actually run the numbers.

So then, let’s go through the full definition carefully, and then work through the math on the part almost every guide glosses over.

I’m Dan Anderson, and getting this definition exactly right matters more than almost any other compliance question in self-directed investing because it’s the single rule most likely to result in an account being closed entirely if misunderstood.

Key Takeaways

• Disqualified persons include you, your spouse, your lineal ascendants and descendants and their spouses, and certain fiduciaries and service providers to the plan.
• Siblings, in-laws by blood relation only (not by marriage to a disqualified lineal relative), aunts, uncles, and cousins are notably NOT disqualified persons.
• An entity becomes disqualified once disqualified persons, combined, own or control 50 percent or more of it.
• That 50 percent threshold aggregates ownership across multiple disqualified people; it isn’t measured person by person.

The Individuals Who Are Always Disqualified

Under IRC §4975(e)(2), the following are disqualified persons with respect to your IRA:

• You, the IRA owner, and your beneficiary
• Your spouse
• Your lineal ascendants: parents, grandparents, great-grandparents
• Your lineal descendants: children, grandchildren, great-grandchildren
• The spouses of your lineal descendants (your children’s and grandchildren’s spouses)
• Any fiduciary of the IRA, including your custodian and anyone with discretionary authority over the account
• Anyone providing investment advice to the IRA for a fee
• Any person providing services to the plan, such as an administrator

Who’s Notably Left Off That List

This is the detail that surprises almost everyone the first time they hear it. The following relationships are not disqualified persons under the federal definition:

• Siblings, brothers and sisters
• Aunts, uncles, and cousins
• Your spouse’s parents, siblings, or other relatives (in-laws are not automatically disqualified through marriage alone)
• Friends, business partners, and anyone else outside the specific lineal and fiduciary categories above

Your IRA can transact with a sibling or a friend in ways it absolutely cannot with a spouse or child. That said, a deal with a non-disqualified person should still hold up as a genuine, arm’s-length transaction on its own merits. The absence of a legal prohibition isn’t the same as a guarantee the deal is wise.

An Interesting Twist

While we are at it, keep in mind that two or more self-directed IRAs owned by disqualified persons can pool their capital to invest in alternative assets like real estate, provided the transaction is properly structured from the very beginning.

While Internal Revenue Code (IRC) Section 4975 strictly bars transactions between an IRA and a disqualified person, IRAs are not disqualified persons to one another. Co-investing at the time of the initial purchase from an unrelated third party does not violate the law.

Here are a couple of examples.

Lawful: Your self-directed IRA and your spouse’s self-directed IRA pool their cash to buy a $500,000 commercial property from an unrelated third party, with a simultaneous closing and a 50/50 split.

Awful: Your SDIRA already owns a property, and you later have your spouse’s SDIRA buy a 50% stake in it. This constitutes an indirect sale or exchange of property between an IRA and a disqualified person, which immediately triggers account disqualification.

An important point to remember if you decide to combine IRA funds with a disqualified person: the asset being purchased is a tangible asset, not an entity such as a business. I discuss purchasing entities in the next section.

To conclude this little “interesting twist” diversion, combining IRAs for investment can be powerful and fun, but it requires strict adherence to operational boundaries to avoid severe tax penalties. That’s why I ALWAYS strongly recommend that you consult one or more of your qualified professional team members.

Entities: Where the Real Complexity Lives

Disqualification doesn’t stop at individuals. A corporation, partnership, LLC, or trust becomes a disqualified person once disqualified individuals, combined, own or control 50 percent or more of it. “Control” can include having authority over the entity’s decisions even with less than 50 percent direct ownership, and an officer, director, or 10-percent-or-greater shareholder of a disqualified entity becomes, in turn, a disqualified person themselves.

The word that matters most in that paragraph is combined. This isn’t measured person by person. It’s the total of every disqualified person’s stake added together.

A Worked Example: Where the Math Actually Lands

Here’s a scenario that illustrates exactly how this trips people up. Say you, your spouse, and a close friend each personally own one-third of an LLC that owns a rental property. Your friend isn’t a disqualified person. But you and your spouse both are.

• Your ownership: 33.3%
• Your spouse’s ownership: 33.3%
• Combined disqualified ownership: 66.6%
• Your friend’s ownership (not disqualified, but irrelevant to the threshold calculation): 33.3%

Because your combined disqualified ownership (66.6%) exceeds the 50 percent threshold, the LLC itself becomes a disqualified person, regardless of your friend’s stake. Your IRA cannot buy this property from the LLC, lend it money, or engage in any other transaction with it, even though one of the three owners isn’t disqualified at all and even though no single disqualified person individually crosses 50 percent.

Change the numbers slightly, say you own 20%, your spouse owns 15%, and two unrelated friends split the remaining 65%, and the math flips. Combined disqualified ownership is only 35%, below the threshold, so the entity is not automatically disqualified on ownership grounds alone (though the control test could still apply if you exercise outsized decision-making authority despite the lower stake).

The lesson: never assume an entity is safe to transact with just because your personal stake looks modest. Add up every disqualified person’s ownership together before concluding either way.

A Few Specific Scenarios Worth Knowing

Investing Alongside a Disqualified Person, Without a Prohibited Transaction

It is possible for your IRA to invest in the same asset as a disqualified person, as long as there’s no pre-arranged deal benefiting that person and no shared financial interest created by the structure. For example, buying 50% of a property where your brother independently owns the other 50% can work, since a sibling isn’t disqualified. The same structure with your spouse instead of your sibling would not work.

Forming a New Entity Versus Transacting With One Already Formed

Forming a new company by capitalizing it with IRA funds is not, by itself, a prohibited transaction (as in Swanson v. Commissioner). But the moment that company exists, it becomes a disqualified person if you or your family control it, and any transaction with it afterward, a loan, an additional capital contribution, a service contract, falls under the same restrictions as any other disqualified entity.

Personal Guarantees Count as Indirect Transactions

Even when a disqualified person isn’t a direct party to a deal, providing a personal guarantee or pledging personal assets as collateral for a loan made to the IRA counts as an indirect extension of credit, which is prohibited. This was the central issue in Peek v. Commissioner, where two IRA owners personally guaranteed a loan to an entity their IRAs owned.

A Practical Way to Check Before Any Transaction

1. List everyone with a personal or financial stake in the deal.
2. Identify which of them fall into the lineal family, spouse, or fiduciary categories above.
3. If any entity is involved, add up the ownership percentage of every disqualified person in that list, not just your own stake.
4. If that combined total reaches 50 percent or more, treat the entity as disqualified and avoid any direct transaction between it and your IRA.
5. When the math is close to the threshold, or control feels ambiguous even with lower ownership, get a second opinion before proceeding.
6. Check in with your qualified professional team members!

Where IRA Express Fits In

At IRA Express, we can’t tell you whether a specific deal is wise, but we can help you noodle through whether a transaction’s structure raises a disqualified person question before you’re financially committed to it.

If you’re looking at a deal involving family members, friends, or an entity with mixed ownership, contact me, Dan Anderson, directly. Running the combined-ownership math together before closing is a great deal easier than untangling it afterward.

You can also review the broader compliance picture on our Self-Directed Plan Types page, or see how these rules intersect with specific assets on our Investment Options page.

Frequently Asked Questions

Is my sister-in-law a disqualified person?

Generally no, unless she’s the spouse of one of your own lineal descendants (your child’s spouse, for instance). Your spouse’s siblings are not disqualified persons under the federal definition.

If I own less than 50% of a company myself, is it automatically safe?

Not necessarily. The threshold is based on combined ownership across all disqualified persons, not your individual stake alone. Add up your spouse’s, your children’s, and your own ownership together before concluding it’s safe.

Can my IRA invest in a business my cousin owns and runs?

Generally yes, since cousins aren’t disqualified persons, assuming no other disqualified person also holds a stake that would push combined ownership to 50 percent or more.

Does providing free advice to my IRA make me a disqualified person in a new way?

You’re already a disqualified person as the IRA owner. Providing paid investment advice to the plan adds a separate disqualification category, relevant mainly for outside advisors rather than the owner themselves.

What if I’m not sure whether an entity crosses the 50 percent threshold?

Map out every owner’s relationship to you and add up the percentages held by anyone in a disqualified category. If the math is close or unclear, get a second opinion from a qualified professional before proceeding.

The Bottom Line

The individual side of this definition is simple enough to memorize in a minute. The entity side requires actual arithmetic, adding up every disqualified person’s stake rather than checking your own ownership in isolation. Get in the habit of doing that math before any transaction involving a business entity, and this becomes one of the more manageable rules in self-directed investing rather than one of the riskiest.

If you want to run the numbers together on a specific deal, contact me directly. I’d rather check the math with you now than have either of us find out it was wrong later.

Sources: Internal Revenue Code §4975(e)(2) (Cornell Legal Information Institute); Swanson v. Commissioner, 106 T.C. 76 (1996); Peek v. Commissioner, 140 T.C. No. 12 (2013).