You should determine the separate guest house basis from the total cost of the property. Allocate that as the basis for depreciation of the building itself. Since this is sort of a totally separate structture, you should compute the percentage for mortgage interest and property taxes to split between Schedule E, Rental and Schedule A itemized deductions.
Is this a short term, Air B-n-B type rental, then you have separate rules for those tpes of rentals
Generally, landlords filing 1040 or 1040-SR returns will report their rental income and expenses on IRS Schedule E: Supplemental Income and Loss.
However, if you provide "substantial services" to your tenants or your real estate business generates rental income, use Schedule C: Profit or Loss from Business. The same holds true for properties considered short-term rentals, i.e. properties with an average per-tenant rental period of less than 7 days.
Properties rented through a corporation or partnership (including LLCs taxed as such) report rent-related income and expenses on the business's return.
How can I tell if I'm providing "substantial services" to my renters?
Substantial services go above and beyond the basic services typically provided to renters (utilities, maintenance, landscaping, trash collection, etc.). If you’re providing hotel-like perks such as regular cleaning or maid service (in excess of 10% of the rental cost), fresh linens or towels, in-room coffee, transportation, or sight-seeing, you’re providing substantial services, and that means you'd file Schedule C.. See link for more information.
Should I Report My Rental on Schedule E or Schedule C
Please use this IRS Pub for additional information about Residential Rental
Residential Rental Publication
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