As the individual is a registered VAT vendor I don't see a problem with claiming the input VAT for the income generating portion of the cost. Unforunately when it comes to selling a property owned by this sole proprietor, the disadvantages of registering as a VAT vendor in the form of a sole proprietor are going to kick in pretty much regardless. It's one of the reasons I'm no fan of registering for VAT in the form of a sole proprietor.