Does ADU Increase Property Tax?

Introduction to ADUs and Property Taxes

Adding an Accessory Dwelling Unit (ADU) to your property is an increasingly popular way to boost both your property value and your potential rental income. This guide is for California homeowners and anyone considering building an ADU who wants to understand the property tax implications. But before you start building, it’s important to understand how an ADU can affect your property taxes.

An ADU is a self-contained living space—sometimes called a second unit or in-law suite—built on the same property as your main house. Because an ADU increases the overall value of your property, it also increases the assessed value used by your county to calculate property taxes. The county assessor determines the ADU's assessed value based on construction costs, market comparisons, or income potential, and then applies the local tax rate to the increased assessed value to calculate your new tax bill.

When you add an ADU, the county assessor will determine how much value the new unit adds to your property. This added value is then used to adjust your property tax bill, resulting in additional property taxes each year. For example, if your ADU adds $150,000 in value, your property taxes may increase by $1,500 per year at a 1% tax rate.

While the increase in assessed value means higher taxes, it also reflects the increased market value of your property and the potential for new rental income. Understanding these tax implications is essential for making smart decisions about your investment and planning for the financial impact of an ADU.

When you build an ADU, your primary house (the existing home or primary home) will not be reassessed. Only the value of the new ADU is added to your property’s assessment, resulting in a blended assessment.

In California, Proposition 13 protects the current assessed value of your main house from increasing more than 2% per year after the initial assessment. This means your property taxes will only increase based on the added value of your ADU, not the entire property. This is called a blended assessment and is performed by the county tax assessor.

The construction quality and the square footage added by your ADU directly impact its assessed value and the resulting tax increase. Assessors often use a cost per square foot (for example, $500-600 per square foot) to estimate the value of an ADU, so a typical 1-bedroom, 600 sqft ADU may be valued at $300,000 to $360,000. Local governments may also charge one-time impact fees for ADUs over a certain size, such as 750 sq. ft. in California.

In California, newly constructed ADUs are assessed at market value as of the date of completion, and state law requires property owners to submit a property owners declaration and building permit to the county assessor. Some jurisdictions, like Washington State, offer temporary property tax exemptions for ADUs under certain conditions, and California's SB 1164 allows some homeowners to delay reassessment for up to 15 years.

Garage conversions and smaller ADUs (such as JADUs) typically have a significantly smaller impact on property taxes compared to larger new construction projects. Home sharing, renting out your ADU as a rental unit, or using it for business activities can have tax implications, including income taxes and eligibility for tax deductions.

Rental income from an ADU can often exceed the tax increase, with potential monthly rental income ranging from $1,500 to $3,000 depending on location and amenities. ADU owners can potentially pocket around $9,850 extra income in the first year after accounting for mortgage, maintenance, and property taxes.

Tax deductions and tax benefits are available for ADU owners who rent out their units, including deductions for maintenance, utilities, mortgage interest, and construction costs if used for rental or business purposes. The rental income from your ADU is taxable, but related expenses can be deducted.

You may be subject to capital gains tax when selling a property with an ADU, and the increased value of your home due to the ADU can affect your tax liability. It is recommended that property owners consult a tax professional or tax advisor for a one-on-one analysis and rough estimate of the tax implications and benefits of their specific ADU project.

The property tax assessment process is governed by state law and requires compliance with local regulations, including submitting a property owners declaration and obtaining a building permit. The value of your home and home value are increased by adding an ADU, and this increased value can affect both property taxes and resale value. The tax assessment and property tax assessment for an ADU is separate from the existing home or primary home, and only the new construction is assessed.

The ADU's assessed value is based on the cost and quality of construction, and the current assessed value of the main house is not affected. The tax increase from an ADU is typically limited to the value of the ADU itself, not the entire property.

When you build an ADU, your primary house will not be reassessed. Only the value of the new ADU is added to your property’s assessment, resulting in a blended assessment. This means your property taxes will only increase based on the added value of your ADU, not the entire property.

ADU Affect on Local Communities

As more homeowners embrace the idea of building Accessory Dwelling Units (ADUs), local communities are experiencing noticeable changes. The construction of ADUs doesn’t just affect individual property taxes—it can also influence the overall property tax base for the entire neighborhood. When new ADUs are added, the assessed value of each property increases, which in turn can boost local tax revenues. These additional funds can be used to support community services, schools, and infrastructure, benefiting everyone in the area.

Beyond property taxes, ADUs can have a positive effect on the resale value of homes within the community. As the demand for flexible living spaces grows, properties with ADUs often become more attractive to buyers, potentially raising the market value of surrounding homes as well. This can be especially beneficial in areas where housing is in high demand, as ADUs provide additional living options without the need for large-scale new construction.

However, the impact of ADUs goes beyond just financial considerations. The addition of these units can subtly shift the character of a neighborhood, introducing more diverse housing options and sometimes increasing population density. While many homeowners appreciate the added value and potential rental income, others may have concerns about changes to parking, traffic, or the overall feel of their community.

Ultimately, the construction of ADUs brings both opportunities and challenges, making it important for property owners and local governments to work together to ensure that growth benefits the entire community.