Any such investing has to be done entirely at arm's length and purely for the benefit of the retirement plan, so you could not use this for your own property or to generate income for yourselves - other than taxable distributions from the IRA after age 59 1/2.There is a lot of good information here on BP about the general concept of these plans.  

My understanding is I can deduct $25K from my AGI, which brings my taxable income down to $75K in 2012.

The paperwork is not that different from normally held real estate and the only taxable event would be if you financed the property and then sold it at a profit.

.- If purchasing and/or improving a property, consult with your CPA on how to mitigate taxable events (for example, if you have to sell stock you own to fund the investment).There are many other questions that could be asked, but given that I do not know much about your situation, I am not sure if they would be relevant.

I have the power to get the loan, but I don't want to take the full taxable income if I plan on splitting all profits with them.

Based on Revenue Procedure 2008-16, we recommend that our clients hold the property for investment for at least 24 months or more, to demonstrate that they have the intent to hold for investment.Once you have held the property for investment for at least 24 months, you can sell it and qualify for a combined 121 Exclusion and 1031 Exchange strategy.You would sell the property, exclude the full $500,000 in capital gains (as a married couple) from your taxable income, and complete a 1031 Exchange on the balance of the transaction to defer the rest of your capital gain, including any depreciation recapture, into the purchase of another rental property.

Borrowed money is not taxable. 

Actual Income - Vacancy = ~Taxable Income). 

However you could finance 100K(plus any closings) which would provide the cash to pay the 20K back.Where people get in trouble is when they do the opposite - pull out cash and decrease the amount of their loans - that is called a taxable boot. 

Second, the 1031 Exchange would allow you to defer all of your income taxes as long as you meet the requirements, so it could be used to keep your taxable income down so that you might still qualify for the subsidy.