Homeowner Advice

Does Adding an ADU Increase Property Taxes in San Diego?

September 23, 2025

30 min read

Adding an Accessory Dwelling Unit (ADU) in California will increase your property taxes, but only modestly. Under Proposition 13, your primary residence is not reassessed at current market value—only the newly constructed ADU portion is added to your tax base. That means your tax increase is based on construction costs, not today’s inflated home values. For San Diego homeowners, this makes ADUs a financially smart way to boost property value and rental income with minimal tax impact. According to the Santa Clara County Assessor, only the marginal value of the ADU is assessed, while Maxable confirms taxes are capped at 1% with a 2% annual increase limit.

Construction progress illustrating Does Adding an ADU Increase Property Taxes in San Diego under Prop 13 rules.

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Daniel Zakheim is a design expert who creates custom ADUs that integrate seamlessly with existing homes, delivering high-ROI results for San Diego homeowners.

How Property Taxes Work in California (Prop 13 Explained)

California property taxation is governed by Proposition 13, a law passed in 1978 that fundamentally reshaped how real estate is assessed. Instead of relying on fluctuating fair market value, property taxes are based on the home’s original purchase price, plus limited annual increases. This system protects property owners from sudden spikes in their tax statements due to rising housing prices across Southern California.

As Maxable explains: “Property taxes are capped at 1% of assessed value, with increases limited to 2% annually.” This makes annual increases modest and predictable, even in high-demand regions like San Diego or Los Angeles.

When it comes to ADUs, the county tax assessor treats them as new construction, similar to adding extra square feet to your home. This results in a blended property assessment: your primary house keeps its original tax basis, while only the ADU’s cost of construction is added to your taxable value. The County Assessor’s Office ensures homeowners still benefit from Prop 13’s protections while paying a fair share for new improvements approved through building permits.

Living room interior showing How Property Taxes Work in California (Prop 13 Explained) for San Diego ADU homeowners.

Prop 13 limits tax increases to 2% annually, giving ADU owners predictable costs even in high-demand markets like San Diego.

Does Adding an ADU Increase Property Taxes?

Building an ADU in California will increase your property taxes, but only on the newly constructed unit. The additional tax is based on the cost of construction of the ADU, not a full reassessment of your primary house at fair market value. This means your existing home’s tax basis remains unchanged, and only the ADU’s value is added as a supplement by the County Assessor’s Office.

The Santa Clara County Assessor explains it clearly: “Yes, but only on the marginal value of the ADU… Assessors throughout California treat ADUs like a home addition. The existing home will not be reassessed.”

From a San Diego County perspective, local assessors often use standardized valuations of $130–$165 per square foot to determine the taxable value of an ADU. For example, a 500 sq. ft. ADU could add roughly $65,000–$82,500 to your property’s assessment, resulting in a relatively modest increase in annual property taxes compared to potential rental property income.

ADU Size	Estimated Taxable Value ($130–$165/sq ft)	Estimated Annual Property Tax Increase (~1%)
400 sq. ft.	$52,000 – $66,000	~$520 – $660 per year
600 sq. ft.	$78,000 – $99,000	~$780 – $990 per year
800 sq. ft.	$104,000 – $132,000	~$1,040 – $1,320 per year
1,000 sq. ft.	$130,000 – $165,000	~$1,300 – $1,650 per year

How Much Will My Property Taxes Go Up With an ADU?

In California, the property tax rate for an ADU is generally calculated at 1–1.5% of the construction cost. For example, if your ADU costs $100,000 to build, you can expect an additional $1,000–$1,500 per year in property taxes (BFPM Inc.).

To put this into perspective, Rocket Lawyer explains: “If you build an ADU valued at $75,000, your tax bill would go up by $750, or $62.50 per month.” A rough estimate of tax implications can also be confirmed through your local assessor’s office or with the help of a tax professional.

For San Diego County homeowners, this modest increase is often offset by strong rental ADU potential. Local ADU rentals typically generate $2,000+ per month, which far exceeds the added tax burden and makes ADUs one of the most practical California laws-backed investments for boosting property value and generating rental property income.

ADU Construction Cost	Estimated Annual Property Tax Increase (1–1.5%)	Average San Diego ADU Rent
$75,000	~$750–$1,125 per year (≈$62–$94/month)	$2,000+/month
$100,000	~$1,000–$1,500 per year (≈$83–$125/month)	$2,000+/month
$150,000	~$1,500–$2,250 per year (≈$125–$188/month)	$2,000+/month
$200,000	~$2,000–$3,000 per year (≈$167–$250/month)	$2,000+/month

When Do ADU Taxes Apply?

ADU-related property taxes take effect once the unit is completed and approved by the County Assessor’s Office. After final inspection, the assessor adds the ADU’s value to your property’s tax roll based on the cost of construction or an assessed market estimate. From that point, your tax statements will reflect about 1% of the ADU’s value per year, in line with California’s Prop 13 property taxation rules.

If your ADU is finished mid-year, you may receive a supplemental tax bill from the local assessor’s office. As BFPM Inc. explains, this ensures the county collects the appropriate share of taxes for the months the ADU is active before the next annual billing cycle.

In short: property owners should expect adjustments to begin immediately after completion, either through a supplemental bill or in the next standard cycle. Consulting a tax advisor can help you get a rough estimate of tax implications before construction, especially if you are considering potential tax incentives or other deductions related to energy-efficient upgrades.

New ADU construction frame representing When Do ADU Taxes Apply under Prop 13 rules.

ADU taxes apply once construction is complete—be prepared for a supplemental bill if finished mid-year.

Factors That Influence Tax Impact

The property tax increase from an ADU depends mainly on construction costs, the type of ADU, and your design choices. Since the County Assessor’s Office bases valuations on cost or square footage, every decision during planning and building directly affects long-term property taxation.

Construction Costs (Materials & Labor): Property tax assessments use the cost of construction as a baseline. Choosing cost-efficient finishes, mid-range floor plans, and smart material swaps can help reduce taxable value. Labor often accounts for 40–50% of total costs, so working with an experienced ADU Designer or builder can prevent overruns (Better Place Design & Build).
ADU Type: A garage conversion usually creates the lowest increase, since the existing structure avoids major expenses like excavation or foundation work. Detached ADUs, however, are the most costly—requiring new site prep, framing, and utilities. Certain bonus ADUs or deed-restricted ADUs may also be treated differently in specific local programs.
Size & Finishes: Larger ADUs naturally add more taxable value. For instance, a 500 sq. ft. ADU may be assessed around $75,000, raising taxes by about $750 annually, while a 1,000 sq. ft. detached ADU could be valued closer to $165,000, adding about $1,650 per year. High-end finishes and luxury features increase assessments, while functional, energy-efficient ADU designs help keep taxes lower and may qualify for tax incentives like energy credits.

Key takeaway: The more cost-efficient, compact, and practical your ADU, the smaller its overall tax impact—and the easier it is to balance added expenses with long-term benefits.

Aerial construction view showing Factors That Influence Tax Impact for California ADUs.

Garage conversions have the lowest tax impact, while detached ADUs with larger square footage add more value to your tax roll.

Ways to Minimize Property Tax Impact

While you can’t avoid property taxes on a new ADU, you can reduce how much is added to your bill by making strategic choices during design and construction. The key is to keep your ADU’s assessed value lower, since the County Assessor’s Office bases property taxation on cost and size.

Cost-Saving Design & Material Swaps: Opt for mid-range, durable finishes instead of luxury upgrades. For example, using quality vinyl flooring instead of marble delivers the same look while lowering taxable value. Smart planning of floor plans with your builder also helps reduce unnecessary costs that raise your tax bill.
Work With an Experienced ADU Builder: Labor can make up 40–50% of total project costs, and overruns directly increase your property tax assessment. Partnering with an ADU specialist, such as a dedicated ADU Designer, ensures your project stays on budget and avoids surprises. Tools like the Revival Homes ADU Budget Calculator or professional one-on-one analysis with a tax advisor can also provide a rough estimate of tax implications before you build.
Leverage Rebates & Incentives: While the ADU itself isn’t tax-exempt, you can offset costs with programs that offer energy-efficient tax credits. Installing solar panels or energy-efficient appliances may qualify you for California electrification rebates or Deductions and Credits, helping reduce your long-term expenses and overall taxes and finances burden.

Bottom line: Keeping costs controlled, working with the right professionals, and taking advantage of available tax incentives can significantly reduce the long-term property tax impact of your ADU.

Exterior ADU completed project highlighting Ways to Minimize Property Tax Impact in San Diego.

Smart design choices, mid-range finishes, and energy-efficient upgrades help reduce long-term tax impact.

Benefits of Adding an ADU (Beyond Property Taxes)

Building an ADU in San Diego comes with long-term financial and lifestyle benefits that outweigh the modest property tax increase. Homeowners gain equity, flexibility, and additional income while still benefiting from California’s Prop 13 protections on their main home.

Rental Income: The average rental ADU in San Diego earns just over $2,000 per month, easily covering an annual tax increase of $1,000–$1,500. For many property owners, this rental income offsets the tax cost in only a few weeks, making ADUs a reliable addition to their overall taxes and finances strategy.
Home Value Boost: Adding an ADU can increase resale value by up to 30%. For example, an $800,000 property could see an added $240,000 in market value, which also improves long-term equity if you work with real estate agents or lenders like Fannie Mae or Freddie Mac.
Multigenerational Living: Beyond dollars, ADUs offer family housing solutions, such as keeping parents close or providing affordable space for adult children. This reduces rental expenses or assisted living costs, while offering convenience and peace of mind.

Key takeaway: A modest property tax increase unlocks major benefits—passive rental property income, significant equity growth, and more flexibility for San Diego homeowners.

Modern ADU kitchen showcasing Benefits of Adding an ADU (Beyond Property Taxes) for homeowners.

ADUs can raise home value by up to 30% and generate rental income that offsets costs far beyond added property taxes.

ADUs & Your Personal Taxes

Building an ADU doesn’t trigger income taxes on its own, but how you use the unit can affect your taxes and finances. If you rent it out, the income must be reported, though much of it can be offset with deductions.

Rental Use = Taxable Income, but Depreciation Helps: Rent collected from an ADU is taxable and usually reported on Schedule E. The IRS allows you to deduct common property repair expenses, homeowners insurance, utilities, and depreciation. Depreciation spreads out the ADU’s construction cost over 27.5 years, treating it as a depreciable asset that reduces taxable income each year.
No Direct Tax Deduction for Construction: The upfront cost of building the ADU is not immediately deductible. Instead, it’s considered a capital improvement, meaning you recover the investment gradually through depreciation if it’s a rental. A tax advisor can help provide a rough estimate of tax implications, especially if you’re balancing mortgage interest or other deductions.
Green Rebates & Incentives: While the ADU itself isn’t exempt from property taxes, you can reduce overall costs through energy-efficient tax credits. Adding solar panels or energy-efficient appliances may qualify for California electrification rebates or federal Deductions and Credits, lowering your out-of-pocket expenses.

Key takeaway: ADUs can create reliable income streams, and with smart planning using depreciation and rebates, they become a strong long-term financial benefit for homeowners.

Completed ADU bedroom interior highlighting ADUs & Your Personal Taxes for rental income and deductions.

Rental ADUs create taxable income, but depreciation and allowable deductions help reduce your overall tax liability.

Conclusion

Adding an ADU in San Diego leads to a modest property tax increase—typically about 1% of the unit’s construction cost—but the financial and lifestyle rewards far outweigh the expense. With rental income averaging $2,000+ per month, potential resale gains of up to 30%, and the flexibility of multigenerational living, ADUs remain one of the smartest investments under current California laws.

At Better Place Design & Build, we specialize in helping San Diego homeowners design and build ADUs that maximize return on investment while minimizing the impact of added costs. From managing regional costs and permitting with the local assessor’s office to ensuring efficient design, our team makes the process simple and stress-free.

Ready to explore your ADU options? Sign up for a free consultation with Better Place Design & Build today and take the next step toward unlocking your property’s full potential.

Aerial neighborhood view summarizing Conclusion of San Diego ADU property tax blog.

ADUs offer high ROI: modest tax increases are easily outweighed by equity growth, rental potential, and long-term flexibility.

Frequently Asked Questions About ADUs and Property Taxes

Yes. Building an ADU in California increases your property taxes, but only for the value of the new unit—not your entire home. This is called a blended assessment: your original home keeps its Prop 13–protected assessed value, while the ADU is added based on construction cost or market value. For example, a $100,000 ADU typically adds about $1,000–$1,500 per year in property taxes.

Yes. ADUs typically increase home value significantly. In California, they can boost resale value by up to 30%, depending on the size, design, and whether it’s a rental-ready unit. On an $800,000 property, that could mean an added $240,000 in equity. Importantly, Prop 13 ensures that only the ADU portion is reassessed for taxes—you still benefit from higher resale value without losing your original low tax base.

Yes, but only slightly. Like an ADU, adding a room or any new construction to your home counts as “assessable new construction” under Prop 13. The county assessor values the new addition and adds it to your existing assessed value, but your original home’s base year value does not change. For example, adding a $50,000 room might increase property taxes by about $500 per year, while the rest of your home remains taxed at its original rate.