If you get audited and caught your entire account holding the property becomes subject to penalties and taxes.  

An environmental engineering firm can conduct an audit for you and likely answer your question with certainty.

Or is it better to use the lower value from the appraisal and minimize audit risk.  

An unsecured credit line option can be used to purchase, rehab, and flip real estate, allowing you to leverage resources to do more deals, and increase your bottom line on each and every property.There are source of funds in the market place that our experts have established relationships by auditing banks and compiling a list of those whom lend to businesses without reporting the business owners or investor’s personal credit!

Have you received an audit yet, or are you merely afraid you may be contacted soon by the IRS?

No I don't know anything about taxes, all of my experience is on the audit side.  

Doing what you suggest is perfectly fine but in the event of an audit it's one less thing to have to explain to the field agent who may or may not understand.

If IRS audits us, I can just request those records from our PM, right?

How does Pa really treat these scenarios during the audit process. 

I'd be happy to talk to you about it via email/messages.You can get tax deductions on work that you don't have 1099's for, but then you have to save the receipt forever so that if you ever get audited, you have the proof you actually paid it.