Unfortunately, their deduction was disallowed following an IRS audit and a subsequent visit to Tax Court.

I worked in both residential and commercial real estate where I audited properties in NYC and other cities across the country. 

- I realize that this maneuver will likely increase the risk of audit....curious to get a sense of how much more risk of audit I will face and does the IRS typically just audit the one year or would they dig into previous years as well?

They would have audit, exam and compliance issues with having a foreclosed junior, and successor non-obligor behind them.

Pace's "community" will get you into trouble if you ever get audited/sued.

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(And even then, they only really look if you are audited)Just start renting! 

While this can land you in potential audit risk, I think you're in the clear here. 

With the tax return you file send a cover letter to the IRS requesting an audit. 

This level of transparency will allow for very clear auditing by any member of the Investment LLC, as to what the construction owner is clearly profiting on the project aside from hard costs of the project.