The Internal Revenue Code (IRC) contains regulations including the prohibited transaction rules that apply to self-directed solo 401k plans. Violation of the prohibited transaction rules will result in taxes and penalties. The prohibited transaction rules are found in IRC Sec. 4975.
One of the rules found in IRC Sec. 4975 is use of solo 401k funds as security for a personal loan (e.g., a home mortgage).
EXAMPLE: James obtains a mortgage for his personal home and used his solo 401k funds as security for the home mortgage.
This transaction resulted in a prohibited solo 401k transaction as the IRS rules restrict the use of solo 401k funds as security for a personal loan.
Taxes and penalties apply to prohibited transactions as outlined in IRC Sec. 4975(a).