Is this a correct assessment?
It's not incorrect. But the more common method is percentage of square footage.
I originally thought I had to use square footage but turbotax says bedroom is acceptable, I think.
In my experience with past versions of the program, it would actually walk you through figuring out the percentage of square footage. But a few things to clarify here.
When it comes to figuring the depreciation, property taxes, insurance and mortgage interest, the percentage of square footage is the preferred method.
For the other expenses, particularly utilities, it's pretty much an even split between square footage or number of occupants. Nothing to do with number of rooms. With the number of occupants method, if you have 5 occupants living in the property and 2 of them are renters, then you can allocate 20% of the utilities to each occupant. With two occupants being renters, that would mean 40% of your utilities are deductible on the SCH E. There are some caveats though.
- If you have only one landline telephone in the property, you are not allowed to claim any portion of the phone bill on SCH E. Whereas if you have two landlines and one of them is for the renter, then the cost of the 2nd landline is 100% deductible as a rental expense.
For all other utilities, they must actually be shared with the tenant. For example, if you have cable TV in the property and there is a physical cable drop in the tenant's room, then the apportioned amount of the bill is deductible on SCH E. But if there is no cable drop in the tenant's room, then it's not considered a shared utility and none of it is deductible.
So it is perfectly possible and okay to use say, percentage of square footage for depreciation, property taxes, insurance and mortgage interest, while using the number of occupants method for everything else in the expenses section. So depreciation may be figured at 10% of the property value based on square footage, while utilities may be figured at percentage of occupants who are renters, and that could work out to 40%.
Keep in mind that once you select a method for depreciation, you can never change that method without jumping through hoops of fire over a lava pit, and lots of paperwork. But you can change your method for all the others year to year with no headaches.
Overall, I highly recommend square footage for the depreciation, taxes, insurance, and interest, as that will most likely result in lower depreciation. Remember, depreciation is not a permanent deduction. So I myself prefer to keep depreciation as low as I legally can.
