1: can we use the interest paid on the loan to add to the cost basis for calculating the LTCG?
no you can't. its personal interest that's not deductible or part of the cost of the property.
Question 2: We improved the lots with a cabin and fishing pier. We spent money, but also did much of the work ourselves. Is there a way to use this "sweat equity" in calculating the cost basis, used to subtract from our gross profit?
the IRS/tax laws have a standard rule for adding sweat equity to basis. It is that you can't. the reason is simple. if it were allowed the tax laws would then require you to pick up as ordinary income probably subject to SE taxes the same amount. the laws would also probably require you to pick up the income in the year the work was performed.
