Since the cottage is a physically separate structure on the same land, I would suggest you treat it as it's own physically separate rental property. That way, you only need to "do the math" the first year. One thing I can't stress enough is the need for "ABSOLUTE" "PERFECTION" in that first year setting things up for this in TurboTax (or any other tax program for that matter). Even the tiniest of mistakes has the potential to grow exponentially as the years pass. Then when you catch your error years down the road (if the IRS doesn't catch it first - and they won't until the year you sell the property) the cost of fixing it will be expensive. So here's what I suggest.
First, understand that depreciation is based on the "LESSER" of either what you paid for the property, or it's FMV on the date it was placed in service. I have no doubt that the lesser amount for the cottage is what you paid for it. Add to that 25% of what you paid for the land when you "originally" purchased the property (even it that was decades ago.) Here's how to figure this using simple numbers.
Purchased house in 1980 for $50K.
My most recent tax bill that does "NOT" include the cottage (2017 tax bill in your case) shows that the county property tax assessor assessed a tax value of $100K for the property, with $30K on the land. (or $70K on the structure). That means 30% of my original cost back in 1980 when I purchased the property was for the land. I originally paid $50K back in 1980, and 30% of that is $15K.
Next, I build the cottage in 2018 at a cost of $135K. I have no doubt that my value did NOT go down since building it. So add to that $135K building cost, $15K for the land allocated to that building and I get a total cost basis of $150K.
So in the assets/depreciation section I will enter the property as a physically separate rental that is 100% rental business use. For COST enter $150K and for COST OF LAND enter $15K. The difference of $135K is what will be depreciated over the next 27.5 years. Done with that. Move on to expenses.
For utilities costs, since they are shared, you have two ways you are allowed to figure it. One way is by percentage of floor space that is "exclusive to the renter". SO if the floorspace of your cottage is 250sq ft and your main residence is 750 sq ft for a total of 1000 sq ft, that would mean the cottage floorspace that is exclusive to the renter is 25%. So you can claim 25% of your shared utility expenses as a rental expense.
The other way that is allowed is by the total number of people that are living in the household. So if it's just you and your spouse in the primary residence and a renter in the cottage, thats a total of three people. So you could claim 33% of all of your shared utility expenses.
Now understand that only applies to "shared" utilities. I would assume at a minimum that would be water and electric. So if cable and internet is not available in the cottage, you can't claim a penny of those expenses as a shared expense. Same holds true for the telephone bill and you definitely without question can't claim any of the cell phone bill as a shared expense.
Next, all repair and maintenance expenses directly related to the cottage only are 100% deductible as such. But watch it on the yard care expenses. Some years, folks at the IRS get a bug up their rump on that, and raise flags. The reason is because yard care is not an expense considered "directly beneficial to the renter". The fact is, you're going to maintain the yard weather you have a renter in it or not. So don't go claiming yard care expenses. Just to risky.
Finally, there are some screens that in my personal opinion (and we all know what opinions are like!) really don't provide the clarity I think they should. So I've included the below for your reference to help you achieve that "absolute perfection" in your first year, which I alluded to above.
Rental Property Dates & Numbers That Matter.
Date of Conversion - If this was your primary residence before, then this date is the day AFTER you moved out.
In Service Date - This is the date a renter "could" have moved in. Usually, this date is the day you put the FOR RENT sign in the front yard.
Number of days Rented - the day count for this starts from the first day a renter "could" have moved in. That should be your "in service" date if you were asked for that. Vacant periods between renters count also PROVIDED you did not live in the house for one single day during said period of vacancy.
Days of Personal Use - This number will be a big fat ZERO. Read the screen. It's asking for the number of days you lived in the property AFTER you converted it to a rental. I seriously doubt (though it is possible) that you lived in the house (or space, if renting a part of your home) as your primary residence or 2nd home, after you converted it to a rental.
Business Use Percentage. 100%. I'll put that in words so there's no doubt I didn't make a typo here. One Hundred Percent. After you converted this property or space to rental use, it was one hundred percent business use. What you used it for prior to the date of conversion doesn't count.
RENTAL PROPERTY ASSETS, MAINTENANCE/CLEANING/REPAIRS DEFINED
Property Improvement.
Property improvements are expenses you incur that add value to the property. Expenses for this are entered in the Assets/Depreciation section and depreciated over time. Property improvements can be done at any time after your initial purchase of the property. It does not matter if it was your residence or a rental at the time of the improvement. It still adds value to the property.
To be classified as a property improvement, two criteria must be met:
1) The improvement must become "a material part of" the property. For example, remodeling the bathroom, new cabinets or appliances in the kitchen. New carpet. Replacing that old Central Air unit.
2) The improvement must add "real" value to the property. In other words, when the property is appraised by a qualified, certified, licensed property appraiser, he will appraise it at a higher value, than he would have without the improvements.
Cleaning & Maintenance
Those expenses incurred to maintain the rental property and it's assets in the useable condition the property and/or asset was designed and intended for. Routine cleaning and maintenance expenses are only deductible if they are incurred while the property is classified as a rental. Cleaning and maintenance expenses incurred in the process of preparing the property for rent are not deductible.
Repair
Those expenses incurred to return the property or it's assets to the same useable condition they were in, prior to the event that caused the property or asset to be unusable. Repair expenses incurred are only deductible if incurred while the property is classified as a rental. Repair costs incurred in the process of preparing the property for rent are not deductible.
Additional clarifications: Painting a room does not qualify as a property improvement. While the paint does become “a material part of” the property, from the perspective of a property appraiser, it doesn’t add “real value” to the property.
However, when you do something like convert the garage into a 3rd bedroom for example, making a 2 bedroom house into a 3 bedroom house adds “real value”. Of course, when you convert the garage to a bedroom, you’re going to paint it. But you will include the cost of painting as a part of the property improvement – not an expense separate from it.
