How ADUs Affect Your Taxes

Building an ADU is a large investment, but investing wisely can bring about great rewards. It is a well known fact that ADUs are incredibly flexible buildings. It is lesser known that this flexibility can benefit you in more ways than one. Building an ADU, though it may increase taxes, may also offer tax deductions and greater property value.

Does an ADU increase property taxes?

Only your ADU will be examined and your primary house will not be reassessed. A new assessment for your ADU is added to the existing assessment for the property, in what is commonly referred to as a “blended assessment.”

Throughout California, newly constructed ADU are assessed at market value as of the date of completion. Typically, assessors will use the cost of construction to value the new ADU. Often assessments value the improvements at “wholesale” costs, e.g. considerably owner than it actually cost to build the ADU.

Generally, property tax rates are in the range of 1-1.5%. So, for example, if the construction cost of your ADU is $200K, you might expect to pay around $2,000 in additional taxes per year. Consult with a tax professional to confirm the impact in your scenario.

With all this said, taxes aren’t all bad… those taxes are directly poured back into your community to help with items such as new streets and better schools.

When will my ADU’s value be added on to my taxes?

All municipalities must notify the County Assessor’s Office whenever building permits are issued. After the reassessment for new construction has been completed by the assessor’s office, the property owner is notified in writing of the new assessment. Since changes are reflected on the next regular property tax bill, it can take up to a year to run through the process before the new tax assessment becomes active.

California state law also requires the assessor’s office to appraise all new construction on January 1st to determine the value for property tax purposes. This taxable value is then reflected on the next regular property tax bill. ​

How will building an ADU affect my personal taxes in California?

An ADU will increase your property value, and with that your property taxes. However, using your ADU wisely can also increase potential for tax deductions on your individual tax return. Simply building an ADU may not immediately affect your taxes, but the way you use your ADU – such as for a rental or for an office space – can lead to the opportunity for yearly deductions and credits.

Can you deduct an ADU from your personal taxes every year?

As mentioned above, the simple act of building an ADU will not have an effect on your individual taxes. Instead, it is the added value and potential for income that alters the amount you are taxed.

If you choose to run your small business out of your newly built ADU, you may be able to depreciate part of the construction of your ADU, as well as any work you put into the space (so long as it is related to your business).

Similarly, you will be able to deduct expenses such as utilities, maintenance of the home, and additional upgrades to your ADU if you choose to rent it out. Keep in mind that this rental income will be subject to income taxes.

When you sell your house, you will be able to write off your ADU construction costs at that time, given the change in value and the cost of the improvements you made.