What You Need to Know About How ADUs Affect Property Taxes

With local laws and regulations being so different from state to state and even city to city, it’s understandable that many people wonder how an accessory dwelling unit (ADU) will impact their property taxes. 

Adding an ADU to your property is likely going to have a positive impact on your taxes. 

Along with benefits like additional living space and increased property value, tax benefits are another perk of adding an accessory dwelling unit to your property. Before we get into that, let’s cover some basics. 

What is An ADU? 

ADUs often go by other names, including a tiny home, garage apartment, or mother-in-law suite to name a few. They are technically a living space, detached from the main home, with its own functioning kitchen and bathroom. 

Property Tax Basics

Property taxes are paid by homeowners, most often twice a year. These funds go towards projects and institutions in the community in which the property is located. The amount is based on the value of the property at the time it was purchased, and is adjusted slightly from there by 1–2% each year. 

This makes it completely understandable that property owners would have concerns about how and when their taxes would increase, should they add an ADU. A valid concern here is especially true for Californians, with the implementation of measures like Prop13

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ADUs Won’t Drastically Increase Your Property Taxes 

People often mistakenly think that their entire property will be reappraised when an accessory dwelling unit is added. While it varies from state to state, and it is essential to look into this based on where you live specifically, more often than not this is not the case. 

In states like California, your property taxes will increase based on a blended assessment. This means that the cost of the ADU multiplied by the current tax rate will simply be added to your current property tax rate. Your main home and property value will not be reassessed and Prop13 will not be implemented. 

For example, if you add an ADU and it costs $160,000 and the property tax in your area is 1%, your property tax will be $1600. This will simply be added to your current property tax. 

Accessory Dwelling Unit Tax Benefits 

While you will have an additional tax added to your current property tax, there are some major tax benefits that come along with having an ADU on your property.

  • Should you rent out your ADU, you will likely recoup the additional tax cost within a month or two. 
  • The first month an ADU is listed as available you can start depreciating the cost on your taxes. Keep in mind that rentals of less than 7 days are often treated differently. Be sure to check your city’s laws. 
  • Some cities and states have specific tax incentives for adding an ADU to your property due to housing shortages.
  • You can take advantage of tax deductions on things like mortgage interest, repairs, and advertising your rental. 

It’s smart to consider the impact an ADU will have on your taxes. Be sure to check your state and city’s specific regulations and tax code. Ultimately, the impact of an accessory dwelling unit is more likely going to be a positive one for you financially, especially when rental income and property value increases are considered in the long term.