Across the country, people are building Accessory Dwelling Units (ADUs) to solve housing issues in their areas. Cities in California are using them to combat the housing crisis, retirees are building them to supplement their income with Airbnbs, and families are using them to take advantage of the benefits of multi generational living. But there is one downside; building an ADU will affect your property taxes.
How Does an ADU Affect Property Taxes?
In most areas, adding an Accessory Dwelling Unit to your property will increase the value of your property, which will cause your property taxes to increase. Depending on where you live, this increase may or may not impact your decision to build an ADU.
If you still have questions about how an ADU will impact your property taxes, don’t worry, we’ve got you covered. In this article, we will go over how your property taxes could change, what you can do to figure out what that change will look like, and how an ADU can still keep you in the financial green.
How Much Will an ADU Affect Property Taxes?
The real question most of us need answered is how much that bill is going to change after your ADU is built, and unfortunately, it is the hardest to answer. Every state, county, school district, and town handles property taxes differently.
How big of a jump you see in your property tax bill at the end of the years is going to be wildly different depending on the following:
The Tax Rate Where You Live
You can get a loose idea of your local tax rate by checking your tax bill and comparing how much you pay in taxes to how much your house is assessed for. This is certainly not the most concrete of answers since property tax formulas are complex in many areas, but it should give you an idea.
For example, if your property value is assessed at $100,000, and you pay $1,000 in taxes, then you pay about 1% of the value of your home every year in property taxes. If your ADU increases the assessed value of your property by $60,000, you can expect your tax bill to jump $600. If your tax rate was 3% (and there are plenty of areas where this is the case if you include school taxes), you could expect your property tax bill to increase by $1,800.
As you can see, your tax rate matters!
Property Values in Your Location
If you live in an area where property values are high, the assessed value of your property is going to increase more than if you lived in an area where property values are lower.
For example, adding an ADU in Los Angeles, where the median home price is near $1 million, according to Forbes, is going to increase the value of your property significantly, likely in the six figures. Whereas adding an ADU in a small city in Texas where the median home price is around $210,000, according to Zillow, will not likely cause a six-figure increase in your assessed property value. (If it did, it would have to be quite a fancy ADU!)
The Value that Your ADU Adds to Your Property
How much value an ADU adds to your property is going to depend primarily on the size and amenities of the ADU.
For example, a studio apartment isn’t going to increase the value of the property as much as a two-bedroom apartment. A 400 square foot ADU also won’t increase your property value as much as a 600 square foot ADU.
So, How Do You Know?
The first thing you need to do before deciding on building an Accessory Dwelling Unit is to call your Tax Assessor’s office. Typically, you would do this after you calculate how much the project will cost and know the size of the project. The Tax Assessor’s office will be able to help you estimate how much your property tax will increase. They will not be able to give you exact numbers until after you complete to project, unfortunately.
This is key because, as you can see from the information above, this increase could be negligible or daunting, depending on where you live.
Even an Attached ADU Will Affect Your Property Taxes
One of the most common questions we get about ADUs is whether an attached unit will still cause property taxes to increase, and the answer is yes.
Just like a major remodel or adding a bedroom or a bathroom to your house will trigger a reassessment, so will adding an ADU.
Why You Should Still Build an Accessory Dwelling Unit
Even though an ADU will increase your property value and you will need to pay more in taxes because of that, there are still many financial reasons you should build one.
ADUs Increase Your Home’s Value
I know we just talked about how this was going to increase the amount of money you have to pay in property taxes, but increasing your home’s value is a good thing when you look at the big picture. Investing in your property will mean you have more equity in your home, and the resale value will also increase.
Renting Out an ADU
You can quickly recoup the extra property tax expenses if you are renting out an ADU either as a long term rental or short term rental. When figuring how much rent you can and should charge for your ADU, factor in this expense.
For example, if you’re tax bill increased by $1,200, you might need to add an extra $100 per month to the rent to account for that and still make the profit that you need.
ADUs Can Lower Your Federal Tax Liability
If you’re renting out your ADU, you can recoup some of the costs when tax time comes. It is best to talk to a tax professional about how much this can save you on your taxes, but here are some ideas for things you may be able to deduct:
- Depreciation
- Cost of repairs
- Utility costs
- Management costs
- Cleaning costs
- Property tax payments
Be sure to check with a tax professional when doing your taxes to make sure that you’re paying (or not paying) the proper amount.
Multigenerational Living Saves Money
Whether your building an ADU so your college graduates can live at home while still having some independence or because your parents want to live as independently as possible while still having some help nearby, multigenerational living is a money saver.
The cost of caring for aging parents is significant, especially if those parents live hours away, and it only increases over time. The upfront cost of investing in an ADU will save thousands in the future and help keep your family healthy, safe, and happy.
ADUs Can Help Your Community
Densely populated cities are experiencing a housing crisis, and ADUs can help, which is why locations like California are helping make it easier for people to build ADUs on their property. Renting out an ADU will help the community in the long term by making housing more available to those who would not be able to find any.
Accessory Dwelling Units: Know Your Why
Above all, when deciding to put an ADU on your property, you need to know your why and keep that at the forefront. There are as many good reasons for building an ADU as there are people. If your reason is compelling, the added expense of property tax should not stand in your way.
Parting Thoughts
ADUs will affect your property taxes, but that is only because ADUs also increase the value of your home. Although nobody wants to pay extra taxes, adding an ADU can be worth the investment in the long run as it will increase the value of your home.