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For the domain, google will not penalize you at all. You might get a lot of value for the keyword in the domain. Just dont get penalities for bad linking between your websites etc.

I'd base the site structure/taxonomy on the user experience and the relevant content that you have for the different categories and sub categories. The main thing is to ask yourself this question " will the user benefit from my site if i have all my site info divided into these categories and sub categories. In your case for the category i would suggest myhomedecoratingsite.com/room/master-suite/                    (however instead of the keyword "room" try searching for another keyword. For the post , i'd suggest myhomedecoratingsite.com/room/master-suite/beautiful-modern-suite/ . The taxonomy also depends on how easy it is for the user to find your content or drill down with the options provided from the category to the sub category. Use breadcrumb links on all the pages. Here's a Link addressing this topic Her's another post by Dr. Pete on this topic