Custodian is asking me to sign a direction letter that lists me as manager of the borrowing entity

The custodian taking no view is the whole design of the product. They are a recordkeeper. Every direction letter I have seen puts the compliance determination on you in writing, which means the form you are filling out is also the document that hangs you if this goes wrong. Read the indemnity clause in your account agreement before the call.

@cobalt is right that they are two questions. I'd add a third. Who negotiated the terms? If your brother-in-law introduced the deal and there is any sense that the 11 percent was set as a favor either direction, that is the fact pattern that gets ugly, independent of whether anyone on the list is technically disqualified.

Dumb question from the outside. If the custodian won't tell you whether a transaction is allowed, what exactly are you paying them for?

@solder I had the same reaction. From what I have read they hold title and file the paperwork so the IRA stays the owner of record. The judgment part was never included.

@solder they are the wall between you and the asset. That is the whole service. It sounds thin until you realize that if you personally hold the note, you have a distribution, not an IRA asset.

I don't understand most of this thread but the part I notice is that you are 62k into a deal you already suspect is a problem. Isn't the answer just don't?

@verity that is closer to right than the rest of us are being. Thicket, the cost of walking is the spread between 11 percent on 62k and whatever passive alternative you find, call it two or three points, so roughly 1,200 to 1,900 a year. The cost of being wrong is the account. Not the deal. The whole account, disqualified as of the first day of the year the transaction happened, with the tax and penalty consequences that follow. That asymmetry does most of the work here without needing to resolve the statute.

@warrant's asymmetry point is the one I would write on the wall. Thicket, when you talk to the attorney, bring the amended operating agreement, the rehab budget line showing the management fee, and a written note on who introduced the deal and who set the rate. That is what she will ask for.

On the note book generally, 96k out on two loans to the same builder is a concentration issue nobody has mentioned. Your third loan question is interesting but your first two are one borrower's balance sheet.

I am mostly lost here but I want to check something. The interest on those notes, that comes back into the IRA with no UBIT because it's passive income, right? That is the part I thought I understood.

@vellum interest is on the exempt side, yes, so straight lending income into the IRA generally doesn't trigger UBIT. Where it turns is if the IRA borrows to make the investment, or if the underlying activity is an operating business rather than passive income. Confirm your own facts with a tax pro, the exemption is narrower than the summaries make it sound.

@tender's concentration point deserves more air. Thicket, if that builder stops paying, you own foreclosure inside an IRA, and every dollar of legal and repair cost has to come from IRA funds. You cannot write a personal check to protect the asset. That constraint has ended more SDIRA note positions than any statute has.

I went through the direction letters at three custodians last year for a different reason and the compensation question is worded differently at each one. One asks about disqualified persons receiving compensation from the transaction. One asks about the IRA holder or any disqualified person receiving compensation in connection with the investment. In connection with is broader. Check which language yours uses, because it changes what you are attesting to, and the answer to the underlying legal question still depends on how the statute applies to your specific facts.

@fathom that difference in wording is the most useful thing in this thread for me and I am not even close to doing one of these.

Thicket, what happens to the 62k if you kill it? Sitting in cash inside the account is a real cost too. I ask because I have money parked doing nothing while I decide, and I have started to notice that indecision has a price I wasn't accounting for.

@meridian at 11 percent forgone that's about 570 a month on 62k. Real, but the thing that would actually cost him is the account blowing up. He is not choosing between 11 and 0, he is choosing between 11 with tail risk and 7 or 8 without.

Reading this before I open anything. The thing I am taking away is that the custodian is not a check on you, so the check has to be you plus a professional you pay.