If he only reinvests the cash he has taken boot in the amount of the note and that will be taxable to him.  

What about the interest they would receive, that would be taxable wouldn't it?

All expenses are paid by the IRA, all income flows to the IRA, and you cannot inject value into the IRA by giving the IRA free labor.With the ROBS program, you can use existing retirement funds to capitalize a business, but the business will be a taxable C-Corp.  

The Philadelphia Homestead exemption offers real estate tax savings to homeowners by reducing the taxable portion of their property assessment by $30,000.

Buying less than your net sale will result in a taxable event.

My taxable income has been about 50% of my distributions.

Now to the tax question, would I be able to use the mortgage interest as a deduction to my taxable income if I set it up as an LLC?

I have enough cash to pay off one of my rentals, which would increase my cashflow by about $600 a month (house rents for $1375 and currently cashflows about $400).Question is, would I be better off simply leaving that house not paid off, with its lower cashflow, and simply invest that same cash into a taxable investment account like Betterment or Wealthfront? 

@Juan Ayala, you're on the right track but there's a couple things that you need to make sure you've got nailed as several of these folks have said.Your CPA can tell you your exact gain and taxable position on the property. 

You will be creating some taxable income and may want to look at ways of dealing with that.Since you will be buying these properties all free and clear you won't have to worry about some of the limits imposed when you try to finance more than 5 investments (heard this got bumped to 9, not confirmed it yet).You may give some thought down the road to 1031 exchanges.