Tax planning renting out rooms in a owner-occupied house

[Wilson L.]

I looked over all the IRS rules regarding rental income in an owner-occupied house.  After looking at everything, this is the plan I've come up with.  Any pointers/tips/suggestions would be helpful.

3bdrm/2ba house with 1 den

Renting out 2 bdrms and the den.  Sqft of rented rooms are about 2/3 of the mbr.

Rooms being rented out will undergo renovations such as new flooring, wood panel walls being replaced w/ drywall, updated bathrooms for rental use, etc.

Separate checking and savings account set up to receive rental income and hold tenant deposits

According to tax rules, I can divide up the shared costs between rental use and personal use by using either sqft of rental vs. entire house (horrible idea since common areas are included), or by number of rented rooms (better idea since it's a larger % on the rental side).  

My questions are:

Should I go by sqft of the rooms (e.g., 66% rental use), or number of rooms (75% rental use) for "rental use?"

I understand that renovation costs (100% for the purpose of the rental area) are 100% deductable, but after considering 66% or 75% of all other costs (mortgage, utilities, etc.), first year deductions would be a good amount above rental income for the year.  Is this allowed?