The first thing you need to do is talk to your landlord. By leaving out that source of information you are making a lot of assumptions. Get allof the information you can before you start doing or saying things. Find out the date of the foreclosure sale and the name of the bank that is foreclosing. If the owner is in financial trouble and you are a potential buyer maybe there is a way this situation can work to your advantage.
An observation with regard to stopping your rent payments: The fact that your landlord is in financial trouble does not give you the right to break a contract with him. It seems to me you are putting your own good credit at risk with this course of action.
In these times of tight financing is any bank going to give you a mortgage if you haven't been paying your rent?
Maybe you can get the owner to credit future rent to you for some of the capital improvements you have made.
Every situation is unique. Maybe you have a written option to buy, maybe it is part of your lease agreement. It's a little late for you, but a lease agreement that has you making major capital improvements to someone elses property is a hazarous proposition.
My own point of view is that you should be prepared to lose anything you put into a property you don't own. If you have alot into this house and you want to own it I would be looking ahead to how you are going to make that happen.
Maybe this will turn into an opportunity for you. Best of luck.

Was this a lease option? Did a Realtor prepare the contract for you? If so, contact the Realor for advice. If not, there are most likely laws in yir state protecting tenants.

You may also want to contact a Realtor, as well as the owners, and see if you can negotiate a short sale.

I'm very sorry to hear about the situation you're in. This sounds like a unique situation but a very serious one. I would need to get more information from you about what your agreement is with your landlord, however I think the best course of action would be to contact a lawyer that specializes in real estate as soon as possible. You can go to http://www.mnfindalawyer.com and select Real Estate and Foreclosure. Also, there are some resources available through the Minnesota Attorney General's website that may be helpful to you to learn more about your rights and your options. You can access these online by going to http://www.ag.state.mn.us/consumer/housing/landlordtenants.asp. I hope this helps. Good luck.

why would you put money into a rental by finishing a basement that you don't own???

sounds like you need legal advice which you will not find here. if you do, run!