If you need more living space, an accessory dwelling unit is a popular choice for property owners in California. Does an ADU increase property tax on your lot? While it’s true that this kind of project can have significant homeowner tax implications, you still have a few options to make it a more tax-friendly undertaking.
How does an ADU affect your assessed property value? Let’s look at what kind of advice a local design and construction contractor like Michael Marini Construction can provide.
What Is an ADU and Why Would It Increase Your Property Taxes?
An ADU is a separate residential dwelling. A homeowner builds this onto an existing lot as a standalone building detached from the primary residence. Your ADU will nearly always be smaller than your main home on the same lot.
An ADU Offers Versatility
Here are some ways that people use an ADU to add value:
- In-law suite
- Rental property
- Adult child’s dwelling
- Living space for grandparents
- Work-from-home space
- Art studio
- Guest house
At a minimum, this dwelling should include a kitchen, bathroom, and bedroom. Larger ADUs may have garages, multiple bedrooms, and media rooms.
An ADU Increases Your Living Area
You’d attract an increase in property taxes if you built a home addition attached to your current house. The ADU will increase your taxes for the same reason. Because the new construction is on the same lot as your current home, government officials determine that it creates extra living space for your property.
The ADU should also allow you to sell your home and lot for a higher amount in the future. With increased property value, increased property taxes are a given – but there are some ways to plan around it.
Do ADUs Qualify for Any Tax Breaks?
Does an ADU increase property tax bills, or can you qualify for a tax break? Some local entities do allow tax breaks for this type of project. For example, if it will be used as living space for an elderly relative, your tax bill might reflect that situation.
If you are renting out the ADU, you probably won’t qualify for any reductions in your property tax assessment. However, you might qualify for some deductions on your income tax when claiming the rental income offset by the cost of repairs and maintenance.
How Much Will My Property Taxes Increase After Building an ADU?
The boost in your property taxes after having an ADU built on your property will depend on the individual project. ADUs with larger-than-average square footage and multiple rooms will increase your property taxes more than something built with only the basics.
A county assessor evaluation may increase the ADU valuation because it includes high-end appliances. If you include luxury trim or flooring, you can expect a larger assessed value from the local authorities and, by extension, a higher tax bill.
If you have a professional design and construction company building your ADU, they can help you estimate your tax bill implications based on the plans for the work. They can also let you know about which features may help you improve property value.
How Can I Use the ADU To Recoup the Construction Expenses and Higher Tax Payments?
Does an ADU increase property tax on your lot, and can you recover anything?
If you use the ADU as a rental property, you can recoup some of the cost of construction and increased taxes through rental income. For people who are paying for an elderly relative or an adult child to live in an apartment somewhere else, it’s possible to save money in the long run by moving them to your ADU.
You should recoup most of the construction cost when you ultimately sell the property. With an ADU, the lot should have a higher selling value.
Let Michael Marini Construction Help You Add an ADU and Understand the Tax Implications
Does an ADU increase property tax? How do you know whether the project is a smart financial choice? If you want to know more about local tax regulations and the potential return on your additional living unit investment, you could contact our local experts.
For most people, an ADU remains a smart way to add living space for renters or aging family members, even after a property tax reassessment. Why not let Michael Marini Construction help you estimate the real estate taxation implications so that you can decide whether to hire us to build your ADU construction project? To learn more, contact us today at 408-310-8732.
