So, what's the verdict on this? Microsoft lists 1.7 as being incompatible with Windows 8.1. But what's the experience here with either a fully patched vanilla or modded install of skyrim? Any special hoops to jump through?

Windows 8.1 here, works fine for me.

Just as long as you don't have the directory installed in the Program Files folder or else UAC will throw a fit, even when it is disabled. I created my own folder for games in My Docs and never once had a issue related to compatibility. No jumping through hoops, either, such as "Edit this registry key" or "Install this little-known 3rd party program".

Better is to create a folder like C:\Games and put your games in there. Even Steam can go in there.

My Documents is still buried in the system (well it's part of the User Profiles), while it does not have as much as a tie in to the UAC, things like System Restore will not help you with anything in My Documents (as it ignores that folder). I have used SR in the past to undo a dodgy upgrade to a mod tool that was installed in C:\Games that would not have been possible to do if it was in My Documents