How do I handle depreciation on gradual increase of rental square footage over 10 years?

[Tlujan]

I've owned my rental property for 10 years.  It is a 2,000 sq ft 4bd home purchased for $275,000 and I lived in it for 5 years before renting 1 bedroom. For the depreciation, I created an asset in TT then calculated 500 sq ft and placed it in service in year 5 (($275,000*.75)*.25=$51,562.50). In year 7, I rented out another room at 500 sq. ft. and added an additional asset;  (($275,000*.75)*.25=$51,562.50.  This year, I'm renting the entire house and I no longer live there. Do I add the remaining 50% of the house as an asset in the same manner as before?  Can I use the current FMV for that 50%? If so, should I have used FMV in year 7 and is there anything to do about it now?

I've seen some conflicting information saying I should retire all assets and convert the house for personal use and back again to start a new cost basis at 100% FMV and new in-service date, but don't think that would be right when I sell and have to pay recapture.  I also have made many improvements that are currently being depreciated and am not sure what to do with those if I retire the house and convert it back. 

[Carl]

I've seen some conflicting information saying I should retire all assets and convert the house for personal use and back again to start a new cost basis at 100%

It's not conflicting. That's only "a part of" the process which I won't get into here.

You are perfectly fine to add the remaining percentage as another asset.  Note that depreciation is based on the *LESSER* of what you paid for the property originally, or it's FMV at the time of conversion. Most likely, what you paid for the property originally is the lesser amount that will be used for depreciation. I seriously doubt that the FMV today, is less than what you originally paid for the property.

So note that the cost basis for depreciation will be what you paid for the property originally (percentage-wise), plus the cost of any property improvements you paid for since you originally purchased the property in 2012. Don't forget to allocate a portion of your cost basis to the land.

When done, the structure cost basis for all assets, plus the last cost basis of all should equal what you paid for the property originally, plus the cost of any property improvements you paid for since you originally purchased the property.

Note that for each asset that depreciation starts on the date that asset was placed in service. So your depreciation start dates for each listed asset that is a percentage of the total will all be different. However, they're all depreciated over 27.5 years with year one being the date "that" specific asset/percentage was placed in service.

[Tlujan]

@Carl thank you so much for the thorough reply, I'm glad I asked. I will use original purchase price, as my adjusted basis is indeed higher.  

"That's only "a part of" the process which I won't get into here."

To clarify, I will not be retiring any assets, but I will be adding the additional percentage of rental use as a separate asset with the start date that portion of the house became available for rent.  Yes?

[Carl]

o clarify, I will not be retiring any assets,

Rental real estate property *is* an asset. Basically, anything used on a recurring basis for the production of income is an asset. Rental real estate is exactly that.

but I will be adding the additional percentage of rental use as a separate asset with the start date that portion of the house became available for rent. Yes?

Correct. One thing you'll need to do that first year is to allocate the property taxes and mortgage interest between SCH E for the period of time it was a rental, and SCH A for the period of time it was personal use.  You'll also have to pro-rate the property insurance. The math will be a bit tricky. But I'm sure you can figure it out.

As for the utilities, that may require some math on your part too. But again, I'm sure you're aware of that stuff can will figure it.

It's also possible that pro-rating