Does an ADU Increase Property Taxes in California?

How ADUs Affect Property Taxes in California

One of the most common questions California homeowners ask before building an Accessory Dwelling Unit (ADU) is whether it will increase their property taxes. The short answer is yes, building an ADU will trigger a property tax increase in California, but the increase is typically much smaller than most homeowners expect, and it does not affect the tax assessment on your existing home.

Understanding how California's property tax system works in relation to ADU construction is essential for planning your project budget and calculating your true return on investment. This guide explains everything you need to know about ADU property taxes in California, from Proposition 13 protections to supplemental tax bills and long-term tax implications.

How Proposition 13 Protects Existing Homeowners

California's property tax system is governed by Proposition 13, which was passed by voters in 1978. This landmark legislation fundamentally changed how properties are taxed in California and provides important protections for homeowners who build ADUs.

Key Proposition 13 Principles

Under Proposition 13, your property is assessed at its purchase price (the base year value), and the assessed value can only increase by a maximum of 2% per year, regardless of how much the market value increases. A full reassessment is only triggered by a change in ownership or new construction.

What This Means for ADU Owners

Here is the critical point that many homeowners misunderstand: building an ADU does NOT trigger a reassessment of your entire property. Only the new construction (the ADU itself) is assessed at current market value. Your existing home's assessed value remains protected under Proposition 13 and continues to increase by no more than 2% annually.

For example, if you purchased your home for $500,000 ten years ago, your home's assessed value is approximately $609,000 (with 2% annual increases). If your home's current market value is $1,200,000, you are still paying property taxes based on the much lower $609,000 assessed value. Building an ADU will not change this. The county will only add the value of the new ADU construction to your existing assessment.

How Your ADU Is Assessed for Property Taxes

When you build an ADU, the county assessor's office will add the value of the new construction to your property's existing assessed value. Understanding how this assessment works helps you anticipate your new tax bill.

The Assessment Process

After your ADU receives its final building inspection and certificate of occupancy, the county assessor is notified of the new construction. The assessor then determines the value of the ADU based on the cost of construction, including materials, labor, permits, and overhead. This value is added to your existing property assessment.

Assessment Calculation Example

In this example, a $200,000 ADU would increase your annual property taxes by approximately $2,200 to $2,500. If you are renting the ADU for $2,000 or more per month, the tax increase represents only about 10% of your rental income, making it a very manageable expense.

What the Assessor Considers

The county assessor bases the ADU assessment on the actual construction costs as reported on your building permit application, the type and quality of construction, the size of the ADU in square footage, and the current cost factors published by the assessor's office. It is important to note that the assessor bases the value on the cost to build the ADU, not on its potential market value or rental income. This distinction often works in the homeowner's favor because the cost of construction may be lower than the market value the ADU adds to your property.

Understanding Supplemental Property Tax Bills

After your ADU is completed, you will receive a supplemental property tax bill. This bill can be confusing, so it is important to understand how it works.

What Is a Supplemental Tax Bill?

A supplemental tax bill covers the difference between your old assessed value and your new assessed value for the remainder of the current tax year. It is a one-time, prorated bill that bridges the gap between when the ADU was completed and the start of the next regular tax year.

When to Expect the Bill

Supplemental tax bills are typically issued within 60 to 90 days after the county assessor processes the new construction report. However, delays of six months or more are not uncommon, especially in large counties like Los Angeles. You may receive the supplemental bill long after the ADU was completed, so set aside funds to cover it.

Calculating Your Supplemental Tax

The supplemental tax is prorated based on how many months remain in the current fiscal year (July 1 to June 30). If your ADU is completed in January, you would owe supplemental taxes for approximately six months (January through June). If completed in October, you would owe for approximately nine months.

Property Tax Differences by California County

While the base property tax rate in California is 1% under Proposition 13, the effective tax rate varies by county and even by city due to additional voter-approved bonds and assessments.

These rates are approximations and can vary within each county based on the specific tax rate area where your property is located. Contact your county assessor's office for the exact rate applicable to your property.

Strategies to Minimize ADU Property Tax Impact

While you cannot avoid property tax increases entirely when building an ADU, there are legitimate strategies to minimize the impact.

Time Your Completion Strategically

If possible, time your ADU completion to minimize the supplemental tax bill. Completing construction close to the end of the fiscal year (approaching June 30) will result in a smaller supplemental tax bill because fewer months will be prorated.

Accurate Cost Reporting

Make sure the construction costs reported on your building permit are accurate. Overestimating costs on the permit application can result in a higher assessment. While you should always be truthful, there is no need to inflate your reported construction costs.

Review Your Assessment

After receiving your new property tax bill, review the assessment carefully. If the assessed value of your ADU seems too high, you have the right to appeal. In California, you can file an informal appeal with your county assessor or a formal appeal with the Assessment Appeals Board.

Claim Applicable Exemptions

If the ADU will be your primary residence (and you are moving from the main house to the ADU), you may be able to transfer your homeowner's exemption. This $7,000 reduction in assessed value translates to approximately $70 in annual tax savings. It is modest, but every bit helps.

Deduct Property Taxes

If you rent out your ADU, the property taxes attributable to the ADU are deductible as a rental expense on your federal and state income tax returns. This can offset a significant portion of the tax increase. Consult with a tax professional to understand how to properly allocate and deduct these expenses.

How Rental Income Offsets Property Tax Increases

For most California homeowners who build ADUs for rental income, the property tax increase is easily covered by the rental revenue. Let's look at the numbers.

As this example shows, the property tax increase from an ADU is typically a minor expense compared to the rental income it generates. Even after accounting for property taxes, insurance, maintenance, and other expenses, most ADU owners in California see a strong positive cash flow from their investment.

Impact on Property Taxes When Selling a Home with an ADU

If you sell your property after building an ADU, the new buyer's property taxes will be based on the purchase price, not on your current assessed value. This is how Proposition 13 works for all property sales in California.

The ADU typically increases the sale price of your property, which means the buyer will pay more in property taxes than you were paying. However, this is the buyer's concern, not yours. As the seller, the ADU increases your sale proceeds, and the buyer accepts the tax implications as part of the purchase.

It is worth noting that the presence of an ADU can actually make your property more attractive to buyers who want to offset their mortgage with rental income from the ADU. In this way, the higher property taxes may be less of a deterrent than you might expect.

Special Circumstances and Exceptions

ADUs for Family Members

If you are building an ADU for a family member rather than for rental income, the property tax increase still applies. The tax assessment is based on the construction, not on how the ADU is used. However, the tax increase may be partially offset if the family member contributes to household expenses.

ADUs on Properties with Mello-Roos

Some properties in California are subject to Mello-Roos Community Facilities District taxes in addition to regular property taxes. Building an ADU on a property with Mello-Roos typically does not increase the Mello-Roos assessment, as these taxes are usually based on the original development plan rather than subsequent improvements.

ADUs and Proposition 19

Proposition 19, which took effect in 2021, allows homeowners aged 55 and older to transfer their Proposition 13 tax base to a new property. If you are eligible for a Prop 19 transfer, the ADU on your current property does not affect your ability to transfer your tax base. The ADU's assessed value is simply added to your existing base.

Tax Planning Strategies for ADU Owners

With proper planning, you can minimize the property tax impact of your ADU while maximizing the financial benefits it provides. Here are several strategies that California ADU owners should consider.

Timing Your ADU Construction

The timing of your ADU construction can affect when your supplemental tax assessment kicks in. In California, the supplemental assessment is based on the date of completion (or change in ownership). If your ADU is completed early in the fiscal year (July through June), you will owe the supplemental taxes for most of that year. If it is completed later in the fiscal year, your supplemental assessment will cover a shorter period. While timing alone should not drive your construction schedule, it is worth understanding how the fiscal year calendar affects your first tax bill.

Keeping Accurate Construction Records

Maintaining detailed records of your ADU construction costs is essential for multiple tax-related reasons. These records help you verify that the assessor's valuation is reasonable, support an assessment appeal if needed, calculate depreciation for rental income tax purposes, and establish your cost basis for future capital gains calculations. Keep all contracts, invoices, receipts, change orders, and permit fees organized and accessible. Your ADU builder should provide detailed invoicing that breaks down costs by category.

Rental Income Tax Deductions

If you rent your ADU, you can deduct several expenses against your rental income, effectively offsetting the property tax increase and other costs:

When you add up depreciation, property taxes, insurance, and maintenance, these deductions can significantly reduce or even eliminate the taxable rental income from your ADU. Work with a tax professional who understands real estate to maximize your deductions. For more on ADU rental income, see our guide on how to rent out your ADU in California.

Cost Segregation Studies

For higher-cost ADUs (typically those costing $200,000 or more), a cost segregation study may allow you to accelerate depreciation deductions. A cost segregation study identifies components of the ADU that qualify for shorter depreciation periods (5, 7, or 15 years instead of 27.5 years), such as appliances, landscaping, specialized plumbing, and certain finishes. While the study itself costs $3,000 to $8,000, the accelerated deductions can generate significant tax savings in the early years of ADU ownership.

Long-Term Property Tax Outlook for ADU Owners

Understanding the long-term property tax trajectory helps you plan your finances and evaluate the overall return on your ADU investment.

Annual Tax Growth Under Proposition 13

After the initial assessment, your ADU's assessed value can increase by a maximum of 2% per year under Proposition 13, regardless of how much the ADU's market value increases. In high-appreciation areas like Los Angeles, this creates a growing gap between your assessed value and market value over time. This gap effectively means you are paying a declining percentage of taxes relative to the ADU's actual value, making it an increasingly favorable financial situation as the years pass.

Property Tax vs. Rental Income Growth

While your property taxes are capped at 2% annual growth, rental income in California markets has historically grown at 3% to 7% annually. This means that the ratio of property taxes to rental income improves over time. In the first year, your property tax increase might represent 10% to 15% of your ADU rental income. After ten years, that percentage drops to 7% to 10% as rental income has outpaced the capped tax growth.

Considerations at Sale

When you eventually sell your property, the ADU will contribute to the overall sale price and your capital gains. The additional property taxes you paid over the years of ownership are fully deductible against the capital gain. Plan ahead with a tax professional to understand how the sale will be treated and whether strategies like a 1031 exchange or the primary residence exclusion (up to $250,000 for individuals or $500,000 for married couples) apply to your situation.

Frequently Asked Questions About ADU Property Taxes

Will building an ADU cause my entire property to be reassessed?

No. Under Proposition 13, only the new construction (the ADU) is assessed at current market value. Your existing home's assessed value is not affected and continues to increase by no more than 2% annually.

How much will my property taxes increase after building an ADU?

The increase depends on the cost of your ADU and your local tax rate. For a typical $200,000 ADU in Los Angeles, expect an annual increase of approximately $2,200 to $2,500, or about $185 to $210 per month.

When will I receive my first property tax bill that includes the ADU?

You will receive a supplemental tax bill within 60 to 90 days of the assessor processing the new construction report, which typically occurs after your ADU receives its final inspection. Your regular annual tax bill will reflect the ADU starting in the next fiscal year.

Can I appeal my ADU property tax assessment?

Yes. If you believe your ADU has been overvalued, you can file an appeal with your county's Assessment Appeals Board. You have 60 days from the date of the assessment notice to file an appeal in most California counties.

Are there any property tax exemptions for ADUs in California?

There are no specific property tax exemptions for ADUs in California. However, standard exemptions such as the homeowner's exemption and disabled veteran's exemption still apply to your primary residence. If you rent the ADU, you can deduct the property taxes as a rental expense on your income tax returns.

Do unpermitted ADUs affect property taxes?

Technically, any improvement to your property, including unpermitted construction, can trigger a tax reassessment if the county assessor discovers it. However, if you properly permit your ADU, you ensure legal compliance and protect yourself from penalties. The tax increase from a permitted ADU is a small price to pay for the legal protection and value it provides.

How does an ADU affect property taxes when I sell?

When you sell your property, the new owner's property taxes will be based on the full purchase price, which includes the value of the ADU. Under Proposition 13, your low assessed value does not transfer to the buyer (except in certain parent-to-child transfers under Proposition 19 rules). This means the buyer may pay significantly higher property taxes than you did, but this does not affect the sale price you receive.

Can I protest a supplemental tax bill for my ADU?

Yes. You have the right to file an assessment appeal with your county's Assessment Appeals Board if you believe the assessed value of your ADU is too high. You have 60 days from the date of the supplemental assessment notice to file your appeal. Bring documentation of your actual construction costs, comparable sales, and any evidence that supports a lower valuation.

Is ADU rental income subject to California state income tax?

Yes. ADU rental income is subject to both federal and California state income taxes. However, you can deduct a wide range of expenses against the rental income, including depreciation, property taxes, insurance, repairs, maintenance, and management fees. These deductions can significantly reduce or eliminate the taxable portion of your rental income in the early years of ADU ownership.