Sweat Equity, Rental Properties & Solo 401K

[Angie B.]

I'm hoping someone can help me, as I'm learning what I can about using retirement for investing purposes for my in-laws. My father-in-law already does contract-work for us on the side for our rental properties. He has money in an IRA that he is waiting another couple of years to touch (at which point he will be 59 1/2). What I think he should look into, is establishing a contracting business LLC, opening up a solo 401k, rolling his IRA into that, and then investing in rental properties. (He already had one rental property that he fixed up and is renting, but he would like more.)

My main question is would he be able to do work on these rental properties himself?  I know the IRS considers that contributions, but if his line of business is that kind of work, then can it be considered okay, as long as the dollar amount equivalent of his work is under the maximum contribution limit?  Or does he really have to hire it all out?

Also, if there are any other important issues I'm missing, please point them out.  We'd love to help them find a way to use his retirement savings to invest in rental properties, without having to wait until 59 1/2 to take a large distribution (which he'd have to pay income taxes on).