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ADUs Can Be Taxing, But Not As Much As You Think

ADUs can be taxing, but not as much as you think

Thanks to a new set of state laws signed in late-2019, California property owners can now more easily add units to their single-family and multi-family properties. Adding these units, known officially as Accessory Dwelling Units (ADUs) — and sometimes called in-law units, granny flats or cottages — is one of the best investments you can make to add value to a property.

One of the questions we often hear from property owners who are considering an ADU is, “how will this affect my property taxes?” While this is a fair question, it is important to understand that adding value from an investment standpoint is quite different than adding value from a tax standpoint. We’ve outlined the incredible investment opportunities of ADUs previously, and in summary, those by far outweigh any additional property taxes you may end up paying.

So how do the taxes work? When your ADU project is completed, copies of the building permits are sent to your County’s Assessor. After they are received and reviewed, a desk appraisal is scheduled to determine the fair market value of the newly constructed portion as of the date the construction was completed. Only the portion of the property that was newly constructed is subject to reassessment at fair market value. So, if an ADU is added to a parcel with an existing home, only the portion with the ADU is re-assessed, and the existing property will retain its previously established Proposition 13 base year value.

The added value is not necessarily what you paid for your new structure; it is what your property’s added real value is determined to be. Assessors use three primary ways to determine value:

  1. Income (for commercial/income properties)
  2. Cost of improvements (as determined by either):
    • The State Board of Equalization tables (published annually)
    • The Marshall and Swift Valuation Service Guide (used primarily for commercial and industrial properties, but sometimes used as a reference for residential properties as well)
    • The actual cost of the construction (including all related expenses)
  3. Comparing the values of other recently sold, similar properties

In addition, cities and counties can add additional fees and percentages, such as Oakland, with one of Alameda County’s higher property tax rates at approximately 1.5%. of the assessed value. The tax rate is made up of the ad valorem tax rate of around 1.3% plus special assessments added by local jurisdictions.

So, for example; A home in Oakland appraises for $800,000. An ADU is added that increases the property’s appraised value to $900,000. The supplemental appraisal would be for the added value of $100,000.
The calculation of added taxes for an ADU would be:

$100,000 x 0.015 = $1,500 per year additional property taxes.

We recently worked on a project where the client had just purchased a property with an ADU in the basement. Unfortunately, the unit was not permitted, and after the sale, the owner proceeded to pull permits that triggered an increase in property taxes. We worked with the Assessor not to increase the property taxes since we were able to convince their appraiser that they had already captured the value of the unit at the time of sale and that their new assessment was double taxation.

In summary, the addition of one or more ADUs will increase your property taxes, but not in the drastic way that some property owners fear. Plus, legalizing an existing taxed improvement is a good argument against a tax increase. The bottom line is that ADUs generate rental income that far exceeds any tax increase.

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