You'll also have another set of eyes on the property to catch anything out of the ordinary that you need to know.

Since that place is furnished we had hardwood in living room/common area and  use two of those patio area rugs. 

Installment sale rule between related parties needs to be considered. the seller should collateralize the note with the property (although the construction lender will want the note subordinated), pay off the loan (in addition to regular payments) with release fees as each lot is sold, and make sure the interest is paid (not accrued) regularly.The new built housed will be ordinary income, not capital income. 

Are you implying you want to take some of the passive income you have from rentals that is not subject to SE tax and turn it in to ordinary income??

We want to have a permanent patio built onto our house (Fremont, CA). 

@John CantuFrom the agreement: "Borrower will not sell or transfer any collateral (except normal inventory turnover in the ordinary course of business) described in the "Collateral" paragraph hereof without the prior written consent of SBA."

At some point, I just wonder if a tenant can use the length of the lease as a defense to not knowing understanding some nuance of a lease.At some point, there has to be a reasonable test that gets applied for whether its reasonable that an ordinary person could consume a 20 page lease.That almost seems like it would be considered intentionally complicated to make it difficult for the tenant to know what they're signing.But I bet thats one iron clad lease...... :-)

The thought from my CPA, who I questioned on this, hence the post, was that I can call the loss in building value a loss in year one which would be be flowed through, I have a LLC, at ordinary income tax rates (35%) rather than when I dispose of it in year 2 and the demo costs only save me at long term gains tax (22.8% based on my income).This didn't seem proper tax treatment to me but was curious if I can argue a different intent would there be beneficial tax outcomes?

Long-term cap gain treatment has sooo many benefits over earning ordinary income and paying SE taxes.  

@Brenda HedgesMold...regular old, ordinary green mold doesn't scare ME.