ADUs and Property Taxes: What You Need to Know

Building an ADU is a great way to add value to your property. But will it also increase your property taxes? While you should consult a tax expert to discuss your specific situation, we provide some basic answers for California homeowners below.

What are property taxes used for?

 

Usually twice a year, homeowners pay taxes to their local government based on their property value. In California, a property tax bill actually involves several types of taxes and assessments.  Some of the funds go toward community projects such as schools, safety measures, and infrastructure. Others go toward projects that benefit property owners, such as new street lighting. Property taxes are some of the highest taxes Californians pay—in some years, they shell out more for property taxes and charges than for personal state income taxes! All the revenue remains in the county in which it was collected. 

What is the property tax rate in California?

 

While the exact rate varies by county, the effective property tax rate in California averages about 0.73 percent of the property’s assessed value. That’s well below the national average of 1.07 percent. Proposition 13 is our friend here. Passed way back in 1978, it limits general property taxes to 1 percent of the property’s market value and restricts increases in the assessed value to 2 percent annually.

Does an ADU increase property taxes?

 

Yes. Anything that increases your property value will increase your property taxes. And building an ADU definitely will increase your property value! So your property with its new home will be reassessed at market value as of the date of completion (or as of the January 1 lien date if construction isn’t finished by then). But it’s a blended assessment, meaning the ADU will be assessed separately from your primary home. Then the government will add a property tax that’s usually about 1 percent of the ADU’s assessed value to your existing tax bill. And even though the assessed value—and therefore property taxes—can increase over time, the assessed value can never increase by more than 2 percent a year. Again, that’s thanks to Prop 13.

So, let’s say your ADU cost $199,000. That’s the lowest starting price of a prefab backyard home from Villa, all-inclusive. Assuming the tax is 1 percent of the assessed value, your tax bill would increase by $1,990 per year, or about $165 per month. If you’re going to be housing a loved one in your ADU, that’s a pittance compared to the typical rent for even just a studio in California. And if you’ll be renting out your unit, the rental income would be substantially greater than the tax increase.

Thinking of building an ADU?

 

Start by clicking the button below to get a free property assessment.

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