His primary lending bank was sold... when the new bank reviewed their loans they felt Dave's business was too risky and called his loans.  

FHA loan = for Primary Residence!

The LLC is going to be a disregarded entity, so as far as the IRS is concerned, it is still your primary residence.

The capital gain will be allocated/prorated between the number of years that the property was rented out vs. the number of years that the property was their primary residence. 

@Joseph ScoreseThanks for continued explanations....I almost feel I should have majored in financials in college.

and I didn't even have to pay taxes on that because it was my primary residence for over 2 years!

Bad idea to invest in Galveston for my primary residence?

Ive thought about asking the neighbors but im guessing it would be unlikely that they would know of the landlords primary residence.

That explanation doesn't necessarily make sense though, so it would be great if you know of official IRS documents on that subject.I also contacted the company that did the paperwork for my self directed IRA LLC, MySolo401k, who can recommended by my custodian Ira Services.

Of course you could always supply that equity initially and replace it with a mezz note once the primary note is in place.