This article does not constitute financial advice. You should speak to a qualified tax adviser to determine the best solution for your ADU.
Worried about how adding an Accessory Dwelling Unit (ADU) will affect your property taxes?
You’re not alone. This is a common concern for homeowners in California and beyond.
Here are the key points:
- An ADU increases property taxes by reassessing property value.
- Property tax for an ADU in California is 1% to 1.25% of its value.
- Depreciation and rental expenses can be deducted.
- California offers specific tax credits and incentives for ADUs.
What is an ADU?
An ADU, or Accessory Dwelling Unit, is a secondary housing unit on a single-family residential lot. It can be a backyard cottage, a converted garage, an in-law suite, the list really does go on.
These units offer additional living space and can be used for various purposes, including housing family members or renting out for extra income.
Impact on Property Taxes
Let’s explore exactly how ADUs affect property taxes.
Does an ADU Increase Property Taxes?
Yes, building an ADU generally increases your property taxes, but only by the value of the ADU itself, not the entire home.
The property tax is calculated based on the assessed value of the ADU. In California, this is typically 1% to 1.25% of the added value.
Example: If your ADU is valued at $100,000, expect your annual property tax to increase by $1,000 to $1,250. This is usually split up over 12 months, so you’d expect to pay $100 to $120 (roughly) each month as an additional payment.
Tax Deductions and Benefits
There are a few ways to offset some costs, but always speak to a qualified tax specialist before implementing any of the strategies below:
- Depreciation Deductions: You can depreciate the ADU over several years, reducing taxable income.
- Expense Deductions: If you rent out the ADU, you can deduct expenses like maintenance, utilities, and insurance.
- Tax Credits: In California, there are incentives like the Solar Tax Credit and CalHFA’s ADU Grant Program.
Does Building An ADU Require A Reassessment Of Home Value?
Building an ADU does not affect your current property tax standing as it does not require a reassessment of your home value.
This is important because many people will be paying a lower tax rate due to a lower house price that was assessed years ago. If your house price has increased substantially, this would mean you would need to pay more property tax if the value was reassessed.
Luckily, building an ADU only increases property taxes by a percentage of the ADU’s value, not the whole lot.
How ADUs Affect Personal Taxes
Let’s look at how ADUs can affect personal taxes, specifically in the case of renting an ADU to create income.
Impact on Income Taxes
Renting out an ADU generates rental income, which must be reported on your income tax return.
This income is taxable, but you can offset it with deductions for expenses related to the ADU.
Depreciation
If the ADU is used as a rental property, it can be depreciated over 27.5 years, providing a significant annual tax deduction.
How to Reduce the Tax Burden of an ADU
Here are a few ways you can reduce the tax burden of an ADU.
- Take Advantage of Tax Credits: Utilize state and local tax credits for building ADUs.
- Expense Deductions: Deduct all allowable expenses, including repairs, utilities, and insurance.
- Depreciation: Use depreciation to reduce taxable income over time.
- Consult a Tax Professional: Work with a tax advisor to ensure you’re taking full advantage of available deductions and credits.
A tax professional will also be able to advise the best way to structure the income from an ADU, such as setting up an LLC and so on.
FAQs
Q: Will my main home be reassessed? A: No, in California, only the ADU is reassessed, not the main home.
Q: Are there any state-specific tax benefits? A: Yes, California offers several tax incentives for ADU construction.
Conclusion
Adding an ADU will impact your property taxes by increasing the assessed value of your property.
However, there are tax deductions and state-specific benefits that can help mitigate these costs.
Always consult with a tax professional to understand the full implications.