Assuming the Federal Tax Lien was subordinate to the mortgage being foreclosed and assuming the IRS was properly notified of the foreclosure and did not raise a successful defense to the foreclosure, the IRS has a 120 day right of redemption during which it can purchase the property. 

With the current situation of adding bed and bath under ground, the appraisal appraised the proper at 134,000$... but there is a comp with the exact building, year, SqFt, and construction that sold January that year that has these extra bed and bath above ground and sold for 165,000$!

As of now, one of my goals is to get into real estate as soon as I can, with proper preparation of course.

Most cities follow this requirement.505.4 Water Heating FacilitiesWater heating facilities shall be properly installed, maintained and capable of providing an adequate amount of water to be drawn at every required sink, lavatory, bathtub, shower and laundry facility at a minimum temperature of 110°F (43°C).

And shame on that lender for not vetting the contractor properly. 

Its a matter of handling/categorizing the transaction properly...Does this help clear things up?

Seeing what the proper way to set it as for ubit tax if that applies and how people structured something like this before.

Seeing what the proper way to set it as for ubit tax if that applies and how people structured something like this before.

Seeing what the proper way to set it up and how people structured something like this before.

Proper insurance sent out a note about this and the policy doesn't cover this kind of interruption.