California, a state known for its diverse culture and lively cities, is also notorious for its sky-high real estate prices and ever-increasing property taxes. In recent years, California homeowners have been brainstorming different ways to ease the tax burden. One trick that’s gaining traction? Building Accessory Dwelling Units (ADUs).

Not only do ADUs offer extra living space, but they can also beef up your property’s value and cut down on those hefty tax bills in California.  We have provided a few details of how this secondary unit can impact your finances and tax situation.

1. Does Adding an ADU Increase Property Taxes in California?

Yes, adding an ADU to a property generally increases the property taxes. However, adding this secondary unit will not trigger the taxes on the primary living space. There will be no reassessment of the taxes on the main unit of the property. When you add an ADU to your property, the assessor will add the value of the ADU to the existing value. This process is called blended assessment. The primary house is not reassessed, so the original tax value will remain the same, with an addition of ADUs tax value.

2. How Much Does an ADU Increase Property Taxes in California?

Property tax rates on ADUs in California generally range from 1-1.5% of the construction cost. Example: If the construction cost of an ADU is $300K, you might expect to pay around $3,000 as additional property taxes per year. Consult a tax professional to get an accurate estimate of the impact of adding an ADU on your property taxes, as this varies depending on your specific situation. In California, the property value of an ADU is assessed at market value as of the date of completion.

3. Wondering when the value of your ADU gets added to your property taxes?

All cities and counties must inform the County Assessor’s Office whenever they issue building permits. Once the assessor’s office reassesses the value of a new construction, the property owner receives a letter with a new property assessment. As the changes are reflected in the next regular property tax bill, it may take up to a year for the new assessment tax to become active. Under California law, the assessor’s office must appraise all constructions as of January 1st to evaluate their value for property tax assessment. This value is then shown on the next property tax bill you receive. Note–You can appeal the value if you disagree with the new assessment.

4. Why Inform Your Homeowners’ Insurance Company of the ADU Addition?

It’s crucial for homeowners to communicate with their insurance provider regarding the addition of an ADU to their property. Standard homeowners insurance typically doesn’t extend coverage to renovations or new constructions like an ADU. Before beginning construction on an ADU, homeowners should proactively adjust their insurance policy to ensure adequate coverage for every new unit on their property. The amount of coverage needed will vary based on factors such as the size and market value of the project. It’s important to note that insurance providers will not compensate for any damages to an ADU unless it is explicitly covered under the policy. Therefore, homeowners must take proactive steps to ensure proper coverage and protection for their ADU investment.

5. ADU Tax Benefits

Renting out your ADU can often offset the additional tax costs within a relatively short period, typically a few months. Furthermore, certain cities and states offer specific tax incentives for homeowners who add an ADU to their property.

Additionally, there are opportunities for tax advantages on various aspects related to the ADU, such as deducting mortgage interest, property repair expenses, and advertising costs associated with renting out the unit. These tax benefits can contribute to maximizing the financial gains from your ADU investment.

DISCLAIMER

This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.