basementsubfloor
My basement already has framing and insulation around the outside walls, along with a few outlets in them. If I were to do 3/4" OSB over 1" XPS for a subfloor the sole plates of those outer walls would be completely covered. Would there be any way to make this configuration work short of tearing out and rebuilding the outside walls?
As I understand your question, you do not want to run the inside wall all the way to the ceiling so that you can keep the wall space above the new knee walls. If so you will certainly want to cap the space at the top of the knee wall to leave a good grounding for a finished surface. One way that you can do this is to attach a 2x2 to the inside of the exterior wall and then bridge across from the exterior wall and the top of the knee wall. The bridging plank can be cut to width from a standard sized plank such as a 2x10 or 2x12. Installation in this manner will both support the top of your knee wall and cover the gap between the two walls.
In terms of finishing you could choose to cover this area with drywall or a nice looking board that you would finish to suit your needs.
I would just lay tile on the concrete. It will last longer and be less upkeep down the road. Could always get some rugs if you're worried about your feet being cold.
Best Answer
If you have open studs on the side walls and then want to add inside finish panneling or drywall to those walls after the flooring is in you would need to go along and glue/nail in a spacer block in between each pair of studs so that there is something to nail the bottom edge of the wall material to.