I don't see why you want to make your required depreciation as high as you can, when I would expect you would want it to be as low as you can legally get away with.
I can only surmise that most are not aware that depreciation is not a permanent deduction that you can to take and just forget about it. It doesn't work that way.
Depreciation is recaptured and taxed in the tax year you sell the property. Two things to consider when it comes to selling the property and recapturing depreciation.
1) Recaptured depreciation gets added to to your AGI and therefore increases your AGI. That could bump your AGI just enough, so that you don't qualify for certain deductions and tax credits because your AGI is over a given threshold.
2) The increased AGI has the potential to be just enough to bump you into the next higher tax bracket. With current tax law, a jump from the 10% bracket to the 12% bracket may not be much to the tax payer. But that jump from the 12% bracket to the 22% bracket can be a doozy, depending on how much over that bracket threshold one ends up at.
So I do my best to keep my depreciation deduction as low as a legally can. Even then, when I add up the SCH E deductions of mortgage interest, property taxes and property insurance and add that to the depreciation I'm required to take, that total almost always exceeds the total rental income for the year. Add to that the other allowed rental expenses such as repairs and maintenance, and you're practically guaranteed to operate at a loss every single year the rental is in service.
While the losses can and do offset the taxability of recaptured depreciation, I don't think (not sure) those losses lower the AGI realized from that recaptured depreciation.
While the IRS says you can basically use "any method" to determine your rental percentage, the square footage method is probably the easiest to support and prove should you ever have to.
But, even if you do use the SQ FT method to keep your depreciation low, you can still use other methods for claiming utilities. The two common methods are to use the percentage of utilities that matches the percentage of square footage, or the percentage of utilities based on the number of people living in the house.
For example, if you use the SQ FT method and determine that 10% of your floorspace is rental, you only depreciate 10% of the cost basis.
Then for utilities, lets say you have four people living in the house, and two of them are a couple renting one of your two bedrooms. Figuring utilities based on average use per person, that would be 25% for each person renting. In this scenaro, 50% of the utilities would be a deductible rental expense, even though you're only claiming 10% of your floor space as being exclusive to the renter.
Now for utilities, you can change your method each year with no problem. But I don't know if that would get unwanted attention or not. Probably not. But then, I wouldn't want to "experiment" with that either. 🙂
