Property tax increases for additions, renovations, and ADUs
Every time you add to or renovate your property, the local jurisdiction will want to reassess your property taxes so they can increase their revenue. Although having your taxes go up is never fun, it is important to consider how much they increase vs the added benefits you get from the new project you did to improve your property. Below are some overviews of the tax increases on a range of projects we have worked on in various cities. In almost every case the increase in property taxes were more than offset by the added value of the new ADU or quality of life generated by an addition or remodel. In short, we wouldn’t let taxes stand in the way of moving forward with a great project.
Property Tax Increase for a Berekely ADU
In one of our favorite ADU projects, a homeowner added a 625-square-foot one-bedroom, one-bathroom accessory dwelling unit with a kitchen, living room, and dining room to his backyard in Berkeley, CA. This homeowner recognized that adding a rental unit would bring in additional income for his family and thus was a great investment.
In the year after the ADU was built, there was a 21.9% increase in property taxes, a $1,752 increase from the previous year. Taxes for this home tend to increase 2% each year, so about $1,592 of that increase is the result of adding the ADU. That tax increase breaks down to about $133 per month.
The total cost to design and build this project was $271,456. A $271,000 mortgage at 3.2% interest requires a monthly payment of $1,172. When you add the monthly taxes, you get a total monthly payment of $1,305.
Comparable rents in the area are around $1800 per month. There’s a clear profit for the homeowner in renting this home out, even after the property tax increase.
It’s important to note that when the taxes go up, the main home is not reassessed. As a general rule, you can estimate that your ADU’s annual taxes will be one half of one percent of what you spend on the ADU.
Increase in property taxes when building a 650-square-foot backyard cottage in San Jose
After the completion of a 650-square-foot backyard accessory dwelling unit, the taxes on this property increased 23.6% for a total increase of $2,471. That works out to $205.91 per month.
The cost to build a project like this is around $335,000. The monthly mortgage payment on a $320,000 mortgage at 3.2% interest is $1,384. When you add the property taxes to that, you get a total monthly cost of $1,589.91.
Comparable units in this neighborhood rent for $1,800 to $2,000. Even before the ADU is paid off and even with the tax increase, the property is making money every month.
Increase in property taxes when adding a one-bedroom/one-bathroom addition in Sunnyvale, CA.
Multigenerational living is one of our favorite benefits of home additions and ADUs. Many of our clients have decided to add bedrooms and bathrooms for their aging parents or adult children to move into. Multigenerational living has so many benefits. Grandparents can care for their grandchildren while the parents work. They can help out around the house. Best of all, families tend to be healthier and happier when they’re together, enjoying each other’s company and helping each other every day.
Of course, anyone adding to their home wants to know how the addition will affect their taxes. One such project in Sunnyvale, California, recently resulted in a 3.5% increase, about $606 per year or $50.50 per month.
The addition included a bedroom, a bathroom, and a sitting room for the homeowner’s parents and cost around $250,000 to build. The monthly payment on a $250,000 mortgage at 3.2% is $1,081. Paying that plus the taxes makes $1,131.50 in monthly expenses for this addition. That’s far less than the family would be paying to house the owner’s parents on a separate property.
The benefits of multigenerational living are clear, and even when you consider the increase in property taxes, adding on to a home is well worth the expense.
Increase in property tax when building a 374 square foot ADU in Concord, CA
An accessory dwelling unit (ADU) is a smart investment that will make you money in the form of rental income, personal savings, property value appreciation, or all three. But before you build, it’s a good idea to consider the potential increase in property tax.
An ADU we built in Concord, CA, resulted in a property tax increase of 109.6%, or $1650. This breaks down to an increase of $137.50 each month.
The accessory dwelling is 374 square feet and includes a living area, bathroom, and kitchen. The homeowner built it to live in herself when a family member moved into the main house.
The total cost of the project was 188,668.24.
With a $180,000 mortgage at 3.2% interest, the monthly payment is $778. Add that and the tax increase, and this ADU costs $915.50 each month.
Comparable rents in the area are $1200 per month. Whether the owners rent this unit out or live in it themselves, they’re taking in a profit of over $300 each month. Once the unit is paid off, the profit will be even higher.
Increase in property tax when adding a one-bedroom, one-bathroom addition in San Ramon, California
Whenever you add usable square footage to your home, whether it’s an ADU or simply an addition, you can expect a property tax increase. One of our clients recently added an extension to their home in San Ramon, California. The one-bedroom, one-bathroom addition increased the value of the home and thus their property taxes were raised. The clients built the addition so that their aging parents could move in with them. This is the perfect way for a family to live together.
The total cost of the addition was $218,490.75. After the addition, taxes increased from $6,548 to $7,993, a 22.1% increase. That’s $1,445 per year or $120.41 per month.
The monthly payment on a $200,000 mortgage with a 3.2% interest rate is $865.
$865+$120.41= 985.41
That’s significantly less than they would be paying for a separate residence for their parents. One bedroom, one-bathroom apartments rent for $1500 to $1900 per month in San Ramon, and retirement communities cost a lot more than that. Plus, the family has the benefit of caring for one another in the same home.
Tax increase when you demolish a garage and build a 650-square-foot accessory dwelling in Berkeley, CA
The benefits of adding an ADU are huge. You get a place for loved ones, for yourself, or for renters. One issue we are regularly asked about is tax increases. Since an ADU increases your property value, your property taxes will increase as well. To get a good idea of how ADUs affect taxes, let’s look at this ADU that New Avenue built in Berkeley.
The new backyard cottage, which has one bedroom and one bathroom and is 650 square feet, will be perfect as a guest house or rental home. The total cost of this project, which involved demolishing a garage, moving a driveway, and adding an accessory dwelling with solar power, was $316,465,50.
New taxes after the ADU was added: $15,005
Previous year’s taxes: $12,654
Change in taxes: +$2,351
The annual property taxes increased by 18.6%
The monthly value of this tax increase is $195.92.
With a 3.2% mortgage, the monthly payment for a $300,000 mortgage at 3.2% interest is $1,297.
$1,297 + $195.92=$ 1,492.92 in monthly mortgage and tax payments.
Comparable rents in the area are around $1,700 per month, so the owner is coming out ahead even before the mortgage is paid off.
It’s important to note that your primary home is not reassessed when you build an ADU, but the ADU is taxed. As a general rule, you can estimate that your ADU’s annual taxes will be one half of one percent of what you spend on the ADU.
Tax increase when converting an accessory building into an accessory dwelling in Berkeley
When adding an ADU in Berkeley, you’ll see an increase in property taxes. Here’s how that worked out for one client who converted a backyard structure into an accessory dwelling by adding a kitchen, bathroom, and laundry closet. Before the conversion, this building was just one big room and couldn't be rented out. With the added amenities, the structure can now be used as a guest house or rental home.
Here’s how the costs and income break down:
The total cost of this project was $236,536.14
New taxes after the ADU was added: $10,984
Previous year’s taxes: $9,498
Change in taxes: +$1,486
The annual property taxes increased by 15.6%
The monthly value of this tax increase is $123.83.
With a 3.2% mortgage, the monthly payment for a $230,000 mortgage at 3.2% interest is $1,007.
$1,007 + $123.83=$ 1,130.83 in monthly mortgage and tax payments.
Comparable rents in the area are around $1,700 per month. With a monthly rental income of $1,700, the owner is coming out ahead.
When you factor in the property’s appreciation (around 10% annually in this part of the country), you can clearly see the benefits of owning a rental property like this one.
Tax increase when adding a two-story addition to a home in Berkeley
One of our clients in Berkeley added a two-story addition to the rear of their home. The addition included a family room, a dining room, a laundry room, and a master suite. After the addition, the value of the home increased 10.6%, or approximately $44,400.
Adding the new rooms resulted in a 27.9% tax increase for a total of $1805 per year. This slight increase in property taxes enabled this family to stay in the neighborhood they loved while adding valuable space for their everyday lives.
Tax increase when replacing a garage with a one-bedroom ADU in Berkeley
To explore tax increases in Berkeley when adding an ADU, we’ll take a look at this project, built by New Avenue in 2014. The clients wanted to remove their detached garage and replace it with a one-bedroom, one-bathroom backyard cottage for visitors. Using it as a guest house means everyone is more comfortable. Plus, the people staying there save money they would have spent on lodging elsewhere. If the homeowner does choose to rent it out in the future, the cottage will pay for itself and then some.
Here’s how the costs and income break down:
The total construction budget for this project was $144,060.78.
The property’s assessed value increased 6.7%.
New taxes after the ADU was added: $11,826
Previous year’s taxes: $11,173
Change in taxes: +$653
The annual property taxes increased by 5.8%
The monthly value of this tax increase is $54.41.
With a 3.2% mortgage, the monthly payment for a $180,000 mortgage at 3.2% interest is $778.
$778 + $54.41=$832.41 in monthly mortgage and tax payments.
Comparable rents in the area are $1,700 to $1,900 per month. Even if this ADU rents on the low end of $1,700 per month, the owner is coming out ahead.
Tax increase when converting a garage into a one-bedroom ADU in Santa Cruz
One of our clients in Santa Cruz converted their detached garage into a one-bedroom, one-bathroom ADU with a kitchen and an attic. Adding an accessory dwelling added value to their property and thus affected their property taxes. Fortunately, the return on investment was much greater than the small increase in tax expenses.
Here’s how the costs and income break down:
The total budget for this project was $201,960
The property’s assessed value increased 17.4%.
New taxes after the ADU was added: $9,333
Previous year’s taxes: $6,974
Change in taxes: +$2,358
The annual property taxes increased by 33.8%
The monthly value of this tax increase is $196.50.
With a 3.3% mortgage, the monthly payment for a $200,000 mortgage at 3.2% interest is $865.
$865 + $196.50=$1,061.50 in mortgage and tax payments.
Comparable rents in the area are $1700 to $2200 per month. If this ADU rents for $1700 per month, that leaves $638.50 in net income from the ADU every month. This client is coming out ahead even before the project is paid off.
An ADU is an investment that's practically guaranteed to pay off as soon as it's built. And once your mortgage is paid, you're earning a considerable monthly income while adding affordable housing where it's desperately needed. That's why we've always said that ADUs are a win-win.
