Do self-directed IRAs have different rules about distributions? Like could OP have done these exact investments but avoided the tax hit if they were already in a self-directed account?

Self-directed IRAs follow the same basic distribution rules as any IRA. The difference is what you can invest in while the money remains inside the IRA. If OP had already set up a self-directed IRA before making these investments, they could have made the hard money loan and purchased the rental property directly through the IRA without taking a distribution. The IRA itself would own the property and loan, keeping everything tax-advantaged. All income and gains would flow back into the IRA tax-free (for a Roth). That's the major advantage - making alternative investments while keeping the tax benefits intact.

Yes, that's absolutely true and a critical point. The IRS has strict rules against "self-dealing" transactions. You cannot sell property you already own personally to your IRA - that's considered a prohibited transaction and can result in the entire IRA being disqualified. The same applies to transactions between your IRA and any "disqualified persons" which includes yourself, your spouse, parents, children, and certain business partners. So unfortunately, once you've purchased property personally, there's no way to transfer it into an IRA without triggering these prohibited transaction rules.

Do you know which specific form I should use to claim that loss? And where exactly on the tax return would I put this? I'm using TurboTax and couldn't find an obvious place to enter this type of situation.

For TurboTax, you should report the 1099-INT income as required, then look for the "Miscellaneous Deductions" section (sometimes under "Other Income"). Enter a negative amount equal to your 1099-INT as "Claim of Right" income repayment. If that specific option isn't available, you can use Form 8275 (Disclosure Statement) to explain the situation. TurboTax has a section for additional forms that you can access through the search function. The key is to document that you're not trying to avoid reporting income, but rather addressing a situation where you were issued a 1099 for money you never received.

I actually did get mine revoked last year! I sent a certified letter to the IRS office that issued the 1099-INT explaining that I never received the funds. Included copies of all my bank statements proving no deposit was made. They sent a corrected 1099-INT showing $0 about six weeks later. Much easier than trying to claim it as a loss.

Thanks for this advice! Do you use any specific software or app to track your business expenses throughout the year? And how detailed do your records need to be for things like gas or small tool purchases?

I use a combination of QuickBooks Self-Employed and a separate business credit card that I use exclusively for business purchases. This makes it much easier to track everything come tax time. For expenses like gas and small tools, I keep all receipts and take photos of them with my phone immediately (receipts fade over time). The IRS wants to see that there's documentation for your expenses, so having receipts or electronic records is important. For vehicle expenses, you can either track all actual costs (gas, maintenance, insurance, etc.) or use the standard mileage rate - I find the standard mileage rate easier, but you need to keep a mileage log with dates, destinations, and business purpose.

For 2025, payment apps like Venmo are required to issue a 1099-K if you receive more than $5,000 in business transactions for the year. This is down from the $20,000 threshold they had temporarily extended. So at $30k, you'll definitely get a 1099-K that will be reported to the IRS.

Thanks for this breakdown! I've been trying to find their Schedule L but having trouble locating it through charity navigator and the other public sites. Would this arrangement show up anywhere else on their 990 besides Schedule L?

Yes, there are a few other places to look. Check Part VII of Form 990, which lists compensation for officers, directors and key employees - there should be columns for reporting compensation from "related organizations." Also look at Schedule O, which often contains supplemental information and explanations. Many non-profits also post their full 990 packages (including all schedules) on their websites, or you can request it directly from them - they're legally required to provide copies of their three most recent 990s upon request. Alternatively, you can request copies from the IRS using Form 4506-A, though that takes longer. GuideStar (now part of Candid) usually has more complete 990 packages than Charity Navigator if you create a free account.

How would you even report something like this? I'm on a non-profit board and we've been concerned about some similar arrangements our ED has, but nobody wants to be a whistle-blower.

This is what I did! I logged into my H&R Block account from last year and found my original filing. The AGI was completely different from what I thought it was after the adjustment.

Good point about checking all possible tax software accounts! Sometimes people forget which service they used the previous year, so it's worth checking any tax preparation accounts you might have.

That $0 AGI workaround only works in specific situations - primarily for first-time filers or in years when the IRS specifically allows it. For most people who filed last year, using $0 will cause another rejection. The IRS has been inconsistent with this policy, so it's better to find your actual AGI if possible.