Loan Solo 401k to Brother in Chicago Illinois for real estate purchase | Solo 401k for Chicago Illinois Real Estate | Chicago Solo 401k
Can I open Solo 401k with a Solo 401k provider located in a different state even though I live in Springfield Illinois? Further, after I open Solo 401k, I plan to self-direct it into real estate, but through a trust deed investment (promissory note) to my brother who lives in Chicago Illinois. I have done my research and have learned that my brother is not a disqualified party with respect to investing my solo 401k and at the same time helping him purchases a house in Chicago Illinois, but nonetheless I don’t want to violate the prohibited transaction rules.
Technically your brother does not fall under the solo 401k disqualified party umbrella. Thus, investing your solo 401k through a trust deed investment whereby his Chicago Illinois property will secure your Solo 401k promissory note investment is not prohibited on the surface, but you should still exercise caution.
The prohibited transaction rules do not permit Solo 401k to partake in an investment whose primary purpose is to benefit another party–whether a friend, total stranger, or qualified party (e.g., your brother, sister, aunt, uncle, cousins) or disqualified party (e.g., your grandparents, your father or mother, your spouse) relative –rather than your Solo 401k.
Simply stated, the primary reason of any Solo 401k investment has to be intended for the growth of the Solo 401k not to help your Brother purchase his personal house in Chicago Illinois.
If the IRS rules that a party other than the Solo 401k received an unwarranted benefit, it will most likely rule that your Solo 401k has participated in a prohibited transaction. For instance, if you loan your Brother your Solo 401k through an unsecured promissory note investment and charge 0% interest when the market rate for this type of loan is 7% the IRS could very well rule the investment as prohibited. Even though you may have good intention to help out your brother, the details of the transaction should not reflect that this was your primary objective over and above participating in a favorable investment for the Self-Directed Solo 401k.
