Have a 1 participant plan. Employer is in the real estate business. Money Purchase Plan would like to purchase undeveloped land. Develop the land and sell the lots off. Proceeds from the sale and any other income would come back to the plan. Can anyone point me to where this may be a problem? What about UBI?

Your idea can work but the plan sponsor must be very, very careful.

As a practical matter, it must be an all-cash deal. That is usually a problem.

Also, the investments of the plan must be diversified. Will almost 100% of the plan assets be the raw land? That's hardly diversified.

Once 5500EZ filings are due, there must be a valuation of the assets. A formal appraisal is a plan cost. (I've heard the IRS is "somewhat loose" in enforcing the valuation requirement for a one-person DC plan, but I wouldn't bank on it ...)

The raw land could generate income, via land lease. That's fine.

Any expenses in managing the land should be borne by the plan.

A potential problem is if the Employer (or the participant) is the one performing the land management services. That's a potential violation. However, if he has someone else in the real estate business perform those services, that's fine (but the plan will have to pay for those services).

This is not too uncommon for real estate people. Good luck.

Not sure if this would help, but consider if the plan could invest in the land along with others (other plans or other investors) so that the portion of the plan's assets that are tied up in real estate is minimal. that's the diiversification issue mentioned above.

I wonder how the land is going to be improved. If the plan uses some of its own cash to pay the plan sponsor for the improvements (putting in sewer lines, electrical lines, etc.), then that would seem to be a prohibited transaction. But if the services are provided for free, it might not be a prohibited transaction but the IRS might call it a deemed contribution to the plan.

But if the improvements were paid for by the plan and performed by an unrelated third party, that would be OK.

The plan sponsor cannot be involved in the development without needing a PT exemption.

I am trying to get at the issue of if real estate is held in an IRA, and the IRA holder improves the real estate or manages the real estate at no cost, is such an action a prohibited transaction? Assuming the IRA pays for the cost of all materials, and cash is not being paid by the IRA to the individual, where is the prohibited transaction?

There are some very serious unrelated business taxable income rules problems here.

As a separate matter why would a plan want to invest in RE and give up all of the tax benefits that accrue to individual owners of RE, e.g., depreciation, deduction of interest costs, property taxes and related expenses plus ability to take capital gains and losses, not to mention that plan cannot use borrowed money to purchase the land since that would creat ubit when the property is sold and result in taxation at ordinary income tax rates for a trust, e.g., 38.5% rate after gain exceeds $9200. Also there are some PT rules that must be observed such as a fiduciary cannot use the asseet of the plan for the benefit of his own account.