Two money questions follow every ADU: what will it do to my taxes, and what can it earn? This guide covers the basics and the points to check with an expert.
LA ADU Guide is an information site, not a tax advisor or a lender. Talk to a tax professional and the LA County Assessor about your own case.
Part 1: Rental income
Rent is taxable
The IRS says "in most cases, you must include in your gross income all amounts you receive as rent." Publication 527 explains how to report it, and the 2025 edition covers 2025 returns.
Typical ideas to know:
- You report rent as income and may deduct allowed expenses, such as repairs, insurance, and a share of property taxes and interest.
- If you also use the property yourself, you must divide expenses between rental and personal use. Publication 527 says so directly.
- Cost of the building is recovered through depreciation over years, not deducted all at once.
- Passive loss rules and special allowances for active participation can limit deductions. The details depend on your income. Confirm in the full publication or with a tax professional.
Renting rules in LA
State ADU law has changed several times on how ADUs may be rented, including limits on short-term rentals. We did not verify the current text for this page, so read Gov. Code 66314 and following. Your city may have its own short-term rental rules, and a deed or HOA may too. See ADU rules in California for the state rule basics.
Check any local rent control rule, too. Whether a rental unit falls under a city or state tenant protection law depends on the date built and other facts. We have not reviewed that for this page, so ask the city housing department.
Rent and your loan
Some lenders count expected ADU rent when you apply. Others do not. Ask early. See ADU financing options.
Part 2: Property tax
The basic rule
California's Proposition 13 sets your assessed value when you buy. When you add new construction, the assessor generally adds the value of the new part. It does not usually reassess the whole property at market value. The Board of Equalization oversees how counties handle this.
In practice, that means:
- The ADU is generally appraised as new construction when it is complete.
- Your existing base value for the main house stays in place.
- Your bill rises by the tax on the added assessed value.
- Converting a garage or other space may also count as new construction, because it changes the use and adds value.
The assessor decides the value of the ADU. It may be close to what it would cost to build or what it adds on the market. Ask the Los Angeles County Assessor how it values new ADUs, and watch for notices after your final inspection.
What about the 2024 exclusion bill?
You may read that new ADUs are excluded from reassessment. That refers to Senate Bill 1164 (Newman, 2024). The Board of Equalization analysis says the bill would have added Revenue and Taxation Code section 74.9, which would exclude ADU construction from "new construction" for up to 10 years, or until a change of ownership. It would have applied to construction completed on or after January 1, 2025 and before January 1, 2030.
We could not confirm that it became law, and we found no record of it being enacted. The current status was not confirmed at the legislature's own site. Do not assume the exclusion applies. Ask the Assessor whether any exclusion covers your ADU.
Other triggers
- A sale of the property, or of a part of it, can change the base value.
- A separate sale of an ADU, where a city allows it under Gov. Code 66342, would be a change in ownership of that part.
- Transfers between family members have special rules. Talk to the Assessor before you transfer title.
Notices and deadlines
The Assessor may send a notice when a building permit is finalized. Read it. If you think the value is wrong, there is a formal appeal process. Ask the county for the deadline, because it is short.
Money topics at a glance
| Topic | Basic rule in this guide | Who to ask |
|---|---|---|
| Rent | Generally included in gross income (IRS Publication 527) | Tax professional |
| Personal use | Expenses must be divided between rental and personal use | Tax professional |
| Building cost | Recovered through depreciation over years | Tax professional |
| New ADU value | Generally added as new construction, not a reassessment of the whole home | LA County Assessor |
| SB 1164 exclusion | Not confirmed as law; do not assume it applies | LA County Assessor |
| Short-term rentals | Check Gov. Code 66314 and following, plus city, deed and HOA rules | City housing department |
How to plan
- Ask the LA County Assessor how new ADUs and conversions are valued.
- Estimate the added annual tax using the current rate on the added value. The county tax bill shows the rate.
- Build rent, expenses and tax into a simple yearly budget.
- Keep every receipt, invoice and permit. You need them for depreciation and for assessor questions.
- Ask a tax professional about depreciation and passive loss rules.
Quick checklist
- [ ] Contact the Assessor about new construction value
- [ ] Ask if any ADU exclusion applies to your project
- [ ] Review local short-term and long-term rental rules
- [ ] Set up records for rent, expenses and depreciation
- [ ] Check with your lender whether projected rent counts
- [ ] Keep permits and final inspection records
What to remember
- Rent is generally taxable income, and personal use means expenses must be split.
- A new ADU usually adds to your assessed value, but not by repricing the whole home.
- The 2024 exclusion bill was not confirmed as law. Verify before relying on it.
See ADU cost in Los Angeles and the ADU financing hub for related guides.