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Is buying a pre foreclosure in an OZ a smart real estate investment?

Is there anything in this scenario that would prevent me from saving on my taxes?

  • Matt Campbell
    March 10, 2020

    Since it was likely habituated and previously had depreciation taken on it, the FMV of the tangible property (the building itself) would require a 100% investment of that value to meet the qualified property tests. Say you buy a property for $150,000 and the land is worth $30,000. You need to double the basis of the building by $120,000 in this example.

  • Matthew Rappaport
    March 11, 2020

    To the extent you buy into a debt position or something similar that would give you an advantage in acquiring underlying real estate, there's nothing that out-and-out prevents you from doing it, but compliance with the statute and regulations might be harder. There's some question as to whether the creditor position on a debt instrument, or an option to acquire real estate, should be considered intangible or tangible property for purposes of the OZ rules. In 1031 exchanges, that line is a bit blurry, and the IRS could go either way for purposes of OZs. If the pre-foreclosure play fails, you could be looking at penalties. So there's a heightened risk element to doing this, but it's not totally out of the question.


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