Your agent should be able to help you draw up agreeable terms with the Seller to preserve both of your interests.

I didnt think they could do that, I figured banks had pre-set appraisers they had to draw from.

Draw us a better picture so we can be more helpful.  

Either way, this is money that I can continue to invest in a Tax Advantaged way  in my SDIRA until I actually draw the funds out.

If you are going to get a loan and pay off his mortgage you need papers the bank will draw up in the form of a  mortgage. 

When the net income for a given tax year does start to exceed the allowable depreciation in that tax year, then can one draw on the "banked" depreciation that was not used from prior years?

Back to the drawing board..

Have a nice long conversation with him about what risks are involved and please I can't stress this enough have an attorney draw you up some papers for this adventure.

Of course i would like to expense it but I don't want to draw unnecessary attention from auditors.

@Mike H. thanks for the thorough breakdown of costs.We had come up with something similar in material costs 1200-1500$ and we were trying to figure out how he was justifying a 2000$ price tag for the labour considering this is a small washroom and we aren't seeking high end material.Back to the drawing board.