ADUs and Property Taxes: What You Need to Know

ADUs and Property Taxes: What You Need to Know (Documents)

Property taxes are a very pressing issue for homeowners, particularly due to the existence of Prop 13. Many homeowners who consider adding an ADU have questions about whether it will affect their property taxes and, if so, by how much. Let’s take a look at how ADUs function in relation to property taxes here in California. 

What is an ADU?

If you’re not familiar with the term ADU, you may very well know it by one of its other names such as an in-law apartment. ADU stands for accessory dwelling unit, which is an additional living unit that has both a fully functioning kitchen as well as a bathroom, providing an excellent coliving space. In other words, this is a unit where someone can live full-time on an existing property.

There are a number of typical characteristics of ADUs. They are usually much smaller than the primary dwelling. They typically share a mailing address and do not have separate utilities. Additionally, they often have separate means of entry, although this is not a required characteristic. 

There are also three primary types of ADUs:

Interior. An interior ADU is created through renovation of the existing home. Typically, this occurs through reconfiguring a basement, attic, or attached garage. This typically takes the form of a small apartment. 

Attached. Attached ADUs are add-ons that are built attached to the existing primary residence. If you build an attached ADU, you’ll likely place it in back or to the side; however, another popular format involves creating a living space atop an attached garage

Detached. Detached ADUs simply refer to an ADU that has been built not attached to the main residence. This may be an apartment above a detached garage or a free-standing unit. These types are often referred to as guest cottages or carriage houses. 

Will an ADU trigger an Increase in property taxes?

This is the major question that many of our potential clients ask. Mighty Homes are excellent choices for building an ADU; however, many people are concerned about impacts on existing taxes

This is a particularly important topic here in California due to the existence of Prop 13. With property values in California increasing substantially, homeowners are often paying taxes much lower than the actual value of their home. 

Fortunately, building an ADU will not cause your primary home to be reassessed in value. The ADU will be assessed independently as an addition to your current property with approximately 1% of that assessment added to your existing property tax bill. Prop 13 will not be triggered by building an ADU, and your existing home will not be reassessed. 

In other words, your current property tax will be blended with the ADU. Our clients typically report an increase of $1,000 to $2,000. Let’s take a look at an example. 

Say you build an ADU that is assessed at a value of $150,000. Your assessed property tax on this will be roughly 1%, or $1,500. The tax on your existing home will not change. Thus, your property taxes in this situation will go up by approximately $1,500 per year. 

For those building an ADU for supplemental rental income, you’ll likely recoup this cost by the second month. To put the property tax increase in another perspective, an ADU valued at $150,000 will involve increased property taxes of only $125 per month. 

Is my Home Reassessed when I Add an ADU to My Property?

Again, it is certainly understandable that a homeowner is worried about an ADU triggering a Prop 13 reassessment. If you have owned your home for many years, you are likely paying taxes at an assessed value far lower than the current value of your home. A reassessment would result in a significant increase in property taxes for many homeowners and is certainly something people prefer to avoid. 

Fortunately, as we have learned, the addition of an ADU will not trigger a reassessment of your primary residence. Your property taxes on your existing home will be the same after building an ADU as they are before one. The assessment undertaken will strictly be limited to the ADU itself. Think about our example earlier. 

Thus, the addition of an ADU will create a relatively small increased tax burden. Additionally, there are many values of adding an ADU to your property. In addition to the convenience of having the space or potential for rental income, an ADU will greatly increase the overall value of a property, eventually earning you a much higher price if you ever sell. Furthermore, like your home, an ADU will appreciate over time. 

Final Thoughts

Additional dwelling units, or ADUs, are living units with a fully functioning kitchen and bathroom that typically share a mailing address and utilities with your primary residence. They can be interior, attached, or detached and often have their own entrance and exit independent from your main residence. 

There are many reasons why people decide to add these coliving spaces to their primary residence. For some people, the goal is to simply create an additional space for a family member. Many people use ADUs for in-law visits, to move in an elderly family member, or as an apartment for their adult child. Others decide to invest in an ADU for an additional source of income as a rental property. 

Whatever your reason for investing in an ADU, a typical concern is tax implications, particularly whether or not building an ADU will trigger a reassessment of your primary home. Fortunately, ADUs are assessed separately as an addition to your property and will not cause your home to be reassessed. Thus, the addition to your annual property taxes will be roughly 1% of the value of the ADU, typically $1,000 - $2,000 for our customers. 

To find out more, request for a feasibility study at Feasibility Study Page.