In 1974, following Studebaker's raid of its employees' retirement plan and the company's subsequent collapse, Congress enacted rules for all retirement plans that prohibit persons with a close relationship to the plan from dealing with the plan.
Most people prefer to do business with someone they are close to, that they know and trust based upon prior dealings, or have family relationships with, yet, that is exactly what the law prohibits.
What does this mean when you are investing with your IRA or retirement plan monies? Any time you are dealing with anyone other than a completely unrelated stranger, you must look closely at what you propose to do and who you propose to deal with in order to determine whether you are dealing with a Disqualified Person and thus entering into a Prohibited Transaction.
Prohibited Transactions, just one part of self directed IRA Real Estate Investing No-Nos, are defined by IRC Section 4975.
While a casual reading of the section will likely serve only to confuse you, a thorough reading will eventually reveal that for a Prohibited Transaction to occur there must be three elements existing concurrently.
There must be 1) a Transaction between 2) a Plan and 3) a Disqualified Person.
By definition a self directed IRA is a Plan, and once we refer to a transaction involving value for goods or services as a Transaction, investing a self directed IRA in real estate automatically provides the first two elements; therefore the focus of any Prohibited Transaction question is always going to be whether or not there is a Disqualified Person involved.
The term Transaction does not exist in the statutes, but we use it because it makes sense - it makes the whole concept simple and understandable.
By treating the elements as a formula: "Disqualified Person + Plan + Transaction = Prohibited Transaction" we can immediately see that the only element left in the equation is the question of whether or not there is a Disqualified Person involved.
So, who are Disqualified Persons? This is really a two pronged question.
First, what is a Person, and second, what is the definition of Disqualified? IRC Sec.
7701 defines Person as follows:The term person shall be construed to mean and include an individual, a trust, estate, partnership, association, company or corporation Long story made short, an entity is a person if it can be taxed.
An IRA or other retirement plan will always be included in the definition of a Person, typically because they are trusts.
So, you see, it really all comes down to the definition of Disqualified.
That definition is generally simplified, and presented in many articles, to mean the IRA owner/beneficiary and certain family members.
While that is true to a degree, it glosses over a significant number of other parties or persons defined as Disqualified.
As applied to real estate, IRC 4975 includes, but may not limit, Disqualified Persons to:

1. Trustee, Custodian, or Annuity Issuer -- although I must say I've never seen an annuity issuer involved in a real estate transaction
2. Employer or employee organization
3. Fiduciary
4. Person providing services to the Plan per IRC 4975(e)(2)(B).
   In the case of real estate investing, services include rehab, property management or development, real estate brokering, accounting, legal, etc.
   
5. Certain owners of business interests per IRC 4975(e)(2)(E) - an owner (direct or indirect) of 50% or more ofa a)Corporation -- Combined voting power of all classes or stock entitled to vote or the total value of all shares of all classes of stock of a corporation, b) Partnership -- Capital interests or profits interest of a partnership or c)Trust or Unincorporated Enterprise -- the beneficial interest of a trust or unincorporated enterprise.
   Huh? The above touch on what are known as "attribution rules", which while multifaceted, boil down to this: In a number of instances, even though you do not technically own an entity, the law will treat you as if you do.
   
6. Certain businesses IRC 4975(e)(2)(G) basically says that any entity owned 50% or more by a disqualified person is itself a disqualified person
7. Persons with significant influence in employer, employee organization or certain businesses IRC 4975(e)(2)(H) reads "An officer, director (or an individual having powers or responsibilities similar to those of officers or directors), a 10 percent or more shareholder, or a highly compensated employee (earning 10% or more of the yearly wages of an employer) of a person described in (C), (D), (E) or (G)".
   Essentially this defines a person who on a subjective basis can influence a "person" as being Disqualified, never mind his or her ownership status, or lack of it.
   This is what happened in the Rollins case, which I mean to make the subject of another article or a teleseminar.
   
8. Family members IRC 4975((e)(2)(F) says "no family members", but IRC 4975 (e)(6) defines family as spouse, ancestor, lineal descendant and any spouse of a lineal descendant.
   Who that leaves out, besides you, is your spouse, your children and their spouses, your grandchildren and their spouses, and your parents (and sometimes their spouses -- for instance, in the case of divorce, or the death of one parent, followed by a subsequent re-marriage.
   ) Notice that leaves in siblings (brothers and sisters, and their spouses), aunts and/or uncles and their spouses, and stepfamily.
   However, transactions with them must bear up, under IRS scrutiny, as being mutually beneficial financially.
   

Hopefully, the preceding provides a broad overview of who is a Disqualified Person.
Admittedly, this is one of the most complex areas when it comes to investing self directed IRAs in real estate.
I strongly recommend that, if at all in doubt, you seek qualified advisors rather than relying on the generalizations given here, or elsewhere.