You really need to stop over thinking this, as all you're doing is creating problems in your mind, that do not exist in reality.
1. From now on, a single property will become 2 assets in Turbotax for all coming years until the property is sold. The 1st one is the original which will not be changed at all, the 2nd one is just the step up portion of the same real property. These two will always be kept separately in Turbotax. Is that right?
Spot on correct.
2. Do I need to prorate all my expenses, one by one, between these two assets every year?
No. In fact, that's not possible. You have "ONE SINGLE PROPERTY" that is split in to two separate assets. Everything will show up on the SCH E as a single property under column A of the SCH E.
Can I leave everything to the original asset as before, and put nothing (No income, no expense) in the newly created "step up" asset?
Again, you are confusing yourself. Expenses aren't taken against a single asset. Expenses are taken against "the business" (rental property *is* a type of business) as a whole. If you change 'ANYTHING" on the original asset entry, you will screw up the depreciation history, and because of that the current year's depreciation will also be flat out wrong.
This way, the "step up" asset will only have depreciation but nothing else.
Just like the originaly asset entry will have "only depreciation but nothing else", as it has since day 1 when you entered it.
Turbotax will automatically combine all rental assets when calculating total rental income and tax, so to me, the end result will be the same and it will save me a lot of time to prorate and divide all expenses between these two assets every year. Is this allowed?
Allowed? You're not breaking any laws here. This is how you do it, and the easiest way to do it "correctly" in TurboTax. Remember, the IRS doesn't care about "how" you arrive at your figures. They only care that you report the "correct" figures.
