SD-IRA question: please review and comment on a proposed note
I have a self-directed IRA that I would like to use to invest in a third party's flip. In thinking about a promissory note that would avoid both a prohibited transaction problem and an Unrelated Business Income Tax ("UBIT") problem, I thought of these terms:
(1) The note will have no installment payments. It will have an interest rate of 12%, i.e., a "hard money" rate. Principal and interest will be payable in full at the end of 12 months.
(2) If the borrower sells the flip property prior to the 12-month payable-in-full due date, then the borrower will incur a pre-payment penalty. The amount of the pre-payment penalty will be equal to one-half the net proceeds of sale, minus the accrued interest. Of course accrued interest, and principal, will also be included in the payoff amount.
Does anyone see a prohibited transaction here, or a UBIT problem? Regarding UBIT, this would be the first investment that this SD-IRA has made, since being converted from a traditional IRA.