Making a loan for purchasing income property from Solo 401k ..

[LEONID ORLOV]

I am contemplating to make a loan from my solo 401k to a friend.
The loan will be secured by the property.

I would be interested in a word of wisdom on how it is properly done to avoid trouble with IRS and/or loosing tax exempt status of the funds.

What paperwork is sufficient? do I need to put solo 401k on deed of the property?
Any advice or personal experience would be appreciated

[Ann Bellamy]

LEONID ORLOV, in addition to what Jon Holdman has said, and assuming you are lending from a self directed 401k, not taking a loan from your conventional 401k:

1. Check with your attorney to make sure that you are not in violation of the SAFE act. If the loan is considered to be residential, you (your 401k) could need to be licensed. To avoid this, you would need to engage a mortgage broker.

2. If, as I suspect, you are lending to an entity, then be SURE that the borrower doesn't intend to occupy. Ever. You also won't need the mortgage broker to do the residential compliance paperwork.

3. Make sure you have checked with your IRA Custodian to get the correct exact wording on how the promissory note should be worded (the exact name the note should be in)

4. Submit your DOI (direction of investment) to your custodian (if you use Equity Trust, expect it to take several tries to get the paperwork right). You will need to submit the promissory note and mortgage/deed of trust with the DOI, so your private loan savvy attorney will have had to draw up the Note and Mortgage/DOT already.

5. If your Custodian provides the service, you can log on and create a payment coupon for your borrower to use for payments. Be sure NOT to take the payments yourself, they must go to your 401k.

6. Have your attorney draft a discharge for when the loan is paid off. You will need to provide that payoff for recording when it is finally paid, and it will need to be signed by the custodian.

There are more details involved, but these are the basic steps. If you let me know who your self directed 401k custodian is, I may be able to give more detail.