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.
