Loan Solo 401k To Uncle in San Diego CA | Self-Directed Solo 401k
I live in Los Angeles California and want to Open Solo 401k and loan the funds as a Solo 401k investment to my uncle who lives in San Diego California so that he can purchase his own home. I have read the prohibited transaction rules and it appears my uncle is not a disqualified party. However, I want to make sure that this transaction is not prohibited, so do you know if I loan my Solo 401k funds to my Uncle to buy real estate in San Diego would be a prohibited transaction?
While technically your Uncle is not a disqualified party and, therefore, loaning your Solo 401k funds to your Uncle as an investment for purchasing real estate in San Diego CA is not a prohibited transaction, proceeding with caution is still in order.
Reason being, the prohibited transaction rules do not permit the use of Solo 401k in an investment whose primary purpose is to benefit another party–whether a friend, total stranger, or qualified (e.g., your brother, sister, aunt, uncle, cousins) or disqualified (e.g., your grandparents, your father or mother, your spouse) relative –rather than your Solo 401k.
Put simply, the primary purpose of any Solo 401k investment must be for the growth of the Solo 401k not to help your Uncle purchase real estate in San Diego CA.
If the IRS deems that a party other than the Solo 401k is receiving an unwarranted benefit, it can rule that your Solo 401k has participated in a prohibited transaction. For example, if you give your Uncle an unsecured loan from your Solo 401k with an interest rate of 2% when the market rate for this type of loan is 5.25%, the IRS could deem the transaction prohibited. Even though you may have good intention to help out a friend or relative, the details of the transaction should not reflect that this was your primary objective over and above participating in a good investment for your Self-Directed Solo 401k.
