I was thinking of moving the laundry and water heater stuff to another part of the house and then convert that whole area into a 1 bedroom, 1 bath and kitchen (not too sure about the kitchen) and then rent it out.

In my 'day job' in addition to real estate I have a kitchen & bath remodeling business with a 'retail showroom'. 

I am looking to add a kitchen and bath on the main floor of the home.

*Remove Living Room carpet and damaged kitchen flooring*Install laminate floors in living room and kitchen*Have kitchen cabinets refinished/restored (cheaper than new set)*marble backsplash and surround for fireplace*tile half-bath downstairs floor and replace vanity*remove half-bath downstairs weird rattan wall covering, paint*paint all walls*replace polybutelene with better pipes*tile upstairs baths, add new vanitiesThanks for any and all insights.

I need hardwood floors refinished or carpet put in along with laminate tile in kitchen and bathrooms.

Depending on where you're located, you could make bank with that extra space, especially if it was a fully self-contained apartment with a bathroom, kitchen and separate entrance.

You then apportion your other building expenses and report those on the Schedule E as well.Here are the expenses you'll want to consider:Mortgage InterestProperty TaxInsuranceWater/Gas/Electric/Sewer/Garbage Removal/Lawn Maintenance/Pool Maintenance (presuming your tenant is allowed to use the lawn and pool)Repairs to the property as a whole (ie, roof, plumbing, electrical repairs)Repairs specifically to the space you are rentingDepreciationYou then measure the room you've rented and compare it to the livable square footage of the house.So let's say you're renting a 300 square foot space, your bedroom is 500 square feet and you share the kitchen, bathroom and living areas and those common areas add up to 1000 square feet.So your rented space is 300 + (1000/2) for an effective square footage of 800 square feet rented.You then take the above mentioned expenses and multiply each one by (800/1800) and you claim that amount of expense.The only exception is repairs specifically to the rented area.  

But it has small kitchen (no dishwasher) and shares laundry machine with main house.

We rented equipment and my husband and son did all of the dirt work.

I put roughly 13k into it removing wall paper, wood paneling, replacing a drop ceiling in the kitchen with a dry wall ceiling, refinishing hardwoods, adding lighting, and updating some plumbing.$1100 in rent for a 60k property might sound great, but property taxes on the house are roughly $300/month, so its not as lucrative as it might sound, plus the 13k rehab out of pocket is more than my down payment so it cuts my ROI in half.