How Will Building an ADU Change my Porperty Tax Rate?
April 29, 2019
An astute realtor posed this question to me a week ago: “My client bought her house 40 years ago for $100,000. She’s interested in building an ADU but she doesn’t want her whole property re-assessed for property taxes. What do you know about this?” Truthfully, I didn’t know the exact answer, but one of my superpowers is “figuring it out!” An appraiser I know was able to give me a thorough run down of Prop 13 and a blended assessment. Here’s how this works: Proposition 13 sets the property tax rate at 1% per year for California properties and increases can’t exceed 2% annually, based on the CPI (consumer price index). If you buy a new home, the property is re-assessed at the sales price by the county assessor’s office. If you do an addition or build an ADU on your property, you get a blended assessment. That means that the base value of the existing home stays the same, but the ADU’s value is assessed at the current market rate. Here’s an example:Assume you purchased a home in 2000 for $300,000. Today, the assessed value may be around $360,000 even if the market value of your home is $600,000 (thanks prop 13!). If you build an ADU on your property for $200,000, your tax basis is now $360,000 + $200,000 = $560,000. Fortunately, your entire property is not re-assessed, otherwise your property tax base would be $800,000! If you are trying to do the math on whether building an ADU is worth it because your property tax will go up, you are missing out several key variables to make that analysis. For example, say you are building a 1,000sf ADU for $300/sf and real estate in your neighborhood sells for $500/sf, you spent $300,000 to build, but could sell your property for an extra $500,000! That’s effectively $200,000 in equity you earned by adding the ADU.Additionally, the rate of return for an ADU as a rental is also much higher than buying rental property in the area. Don’t let the property tax increase dissuade you from building an ADU. The benefits far outweigh the costs.
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