You don't need to start from scratch, I found the full solution here:
http://answers.microsoft.com/en-us/windows/forum/windows8_1-windows_install/windows-81-installation-fails-at-installing-app/de6522d2-ee43-49e2-a2e2-6924c9222d27
So what you need to do is set the Windows partition to active, but this will mess up the boot record so you have to have a Windows 8 DVD or USB handy because when you restart it will give you an error.
You boot from the DVD/USB and then follow the instructions in that link so it fixes the boot record and then you run the update, which then works without that stupid annoying error. It keeps all the applications and settings too so no need to install from
scratch.
I think this error is common on DIY desktops and people who have added SSD's because of that set Active step.
After trying everything else possible, I tried this, and yes, it does work, AWESOME. I am very computer literate, and this doesn't make sense (changing the active boot partition to a partition that has no boot files), but it finally allowed the upgrade
to finish and to request the reboot. As previously stated, the system will not boot after this because you changed the active partition to one with no boot files, but if you run the repair option off of the original installation disk or a recovery disk, it
will place the boot files on the changed active partition, allowing it to boot. Mine actually gave an error message saying that the update failed, so I ran it again, and it did the upgrade, reboot, then installed the update automatically.
I have read this "fix" in several different forums, but just could not believe that it would work, so I never tried it, it just does not make sense, at least from a user friendly installation perspective. So now Microsoft needs to figure out an easy way
for this to be accomplished, especially for those a bit reluctant to mess with these settings. It's not rocket science, but it should not be necessary to go through this process.
So to summarize, if you go into Disk Management, you should see two partitions, the first one small (350 MB) possibly saying System Reserved and no drive letter, also saying active: the other being the remainder of your disk that contains the operating
system, and probably with labels of Page File and Primary Partition, probably labeled C. Right click on this larger partition, select "Mark Partition as Active", it will give an error message saying you can only have one active partition, say OK. Now resume
the upgrade. Be sure you have the ability to boot off of an installation disk or USB (you should test this first, Google it if you don't know how). As always, caution says you should back up your data before trying this, as it can make your you system inoperable
if you cannot repair it.