Depreciating an Accessory Dwelling Unit (ADU)

ADU as a standalone rental

If your ADU is fully rented out and you do not use it personally, it is treated like any other residential rental unit. The construction or conversion cost — excluding land — is depreciated over 27.5 years using the mid-month convention.

For a newly built detached ADU, your depreciable basis is the construction cost, plus permitting, architectural, and contractor fees. If the main house was already on the property, you do not depreciate the land again — only the new structure's cost goes onto the depreciation schedule.

Attached ADU and mixed-use properties

For an attached ADU (a basement apartment, in-law suite, or converted garage within the main structure), you need to allocate the purchase price between the rental portion and the personal-use portion of the property. The allocation is typically based on square footage.

Example: You convert your 400 sq ft attached garage into an ADU in a 2,000 sq ft home (total 2,400 sq ft). The ADU represents 16.7% of the structure. You depreciate 16.7% of the home's allocated building value over 27.5 years, plus 100% of the renovation cost attributable to the ADU.

Conversion vs. new construction

A new construction ADU placed in service in the current year uses the current-year placed-in-service date and starts the 27.5-year clock. A converted space (garage, basement) that was previously personal use also uses the placed-in-service date as the rental use commencement date — you cannot back-date depreciation to when the space was built, only to when it started being rented.

Keep meticulous records: the contractor invoices, the cost allocation methodology, and the placed-in-service date (when it was first available for rent, or when the first tenant moved in). These records matter at sale when computing recapture.

A worked example: detached ADU on your primary residence

You own a home you live in and build a detached backyard ADU for $180,000 all-in (construction, permits, architect, and utility connections), placing it in service in April when it is first listed for rent. Because the main house is your personal residence, none of the existing home is depreciable — only the new ADU. The land was already yours and is not depreciated again.

Your depreciable basis is the $180,000 construction cost (land already owned is excluded). Over 27.5 years straight-line, a full year of depreciation is about $6,545. In the first year, using the mid-month convention for an April placed-in-service date (2.576%), your deduction is roughly $4,637. If the ADU rents for $1,800/month ($21,600/year), that depreciation shelters a meaningful slice of the rental income even before other operating deductions.

Cost segregation and bonus depreciation on an ADU

An ADU is a building, and a cost segregation study can break its cost into shorter-lived components — appliances and carpeting (5-year), certain cabinetry and fixtures (7-year), and site work such as a new walkway, fence, or landscaping serving the ADU (15-year land improvements). Those components with a MACRS life of 20 years or less are eligible for bonus depreciation.

Under current law, the One Big Beautiful Bill Act restored 100% bonus depreciation for qualifying property placed in service after January 19, 2025, so the reclassified 5-, 7-, and 15-year pieces of a newly built ADU can potentially be deducted in full in year one. On a modest ADU the study cost may outweigh the benefit, but on a larger or more finished unit it can pull tens of thousands of dollars of deductions forward. As always, the resulting loss is subject to the passive activity rules.

Short-term rental ADUs and the 7-day rule

Many owners rent an ADU on Airbnb or VRBO. If the average guest stay is 7 days or fewer, the activity is not a rental activity under the passive loss regulations — it is treated more like a business. Combined with material participation, this can make the ADU non-passive, so its losses (including accelerated depreciation) may offset your wages and other active income without needing real estate professional status. This is the well-known "short-term rental loophole."

The tradeoff: a true short-term rental where you provide substantial services (daily cleaning, meals, concierge) can be treated as a trade or business subject to self-employment tax on its net income, and it is reported differently. Average-stay tracking and a contemporaneous time log are essential if you intend to rely on non-passive treatment.

Personal use and the §280A allocation

If you use the ADU personally — as a guest suite, a home office, or occasional family housing — the §280A dwelling-unit rules can limit your deductions. When personal use exceeds the greater of 14 days or 10% of the days rented at fair value, deductions (including depreciation) are capped at rental income, and you must allocate every expense between rental and personal days. Depreciation is claimed only on the rental-use fraction.

For a house hack where you live in the main home and rent the ADU exclusively to tenants, the ADU is fully rental and this limitation does not apply. The moment you start using the ADU yourself, though, track the days carefully — the split determines both your depreciation and whether you can claim a loss.

Recapture and common mistakes at sale

All depreciation you claim on the ADU — straight-line building depreciation plus any bonus or accelerated components — reduces your basis and is recaptured at sale. Building depreciation returns as unrecaptured Section 1250 gain (taxed at up to 25%); cost-segregated personal-property components can face Section 1245 ordinary recapture. If the ADU sits on the same parcel as your primary residence, the sale must be allocated between the excludable primary-residence portion (potentially eligible for the Section 121 exclusion) and the rental ADU portion, which is fully taxable and carries the recapture.

The most common mistakes: depreciating the entire home when only the ADU is rented; forgetting to exclude land from the ADU basis; and failing to track personal-use days that trigger the §280A limitation. Keep the construction invoices, the square-footage allocation worksheet, and the placed-in-service documentation permanently — the sale that triggers recapture may be a decade or more away.

Allocating expenses between the ADU and your home

When you rent an ADU while living in the main house, you must split shared costs between the rental portion and your personal residence. Expenses that clearly belong to the ADU — its own utility meter, repairs inside the unit, advertising for tenants — are 100% deductible against rental income. Shared expenses like a single water bill, homeowners insurance, or a roof repair on a structure that houses both must be allocated, typically by square footage or another reasonable method.

Interest is a special case. If you financed the ADU construction with a mortgage or HELOC, the portion of interest attributable to the rental ADU is a Schedule E rental expense, while interest on the portion of debt tied to your personal residence follows the home-mortgage-interest rules on Schedule A. Track the loan proceeds and their use carefully so the interest is split correctly — commingled financing is a frequent source of allocation errors.

State, local, and practical planning angles

Beyond federal depreciation, several practical factors shape an ADU's tax picture. Many states conform to federal MACRS but decouple from bonus depreciation, requiring an add-back and a separate state schedule — so the year-one deduction you claim federally may not fully carry to your state return. Some cities that encouraged ADU construction also reassess property taxes on the added square footage, raising an ongoing deductible expense.

Planning-wise, an ADU is one of the more tax-efficient ways to add a rental because you already own the land, avoiding a second land purchase whose cost could never be depreciated. Deciding how to rent it — long-term (passive, simpler) versus short-term (potentially non-passive, but with self-employment and local-permitting complications) — has a larger tax impact than the depreciation mechanics themselves. Run the numbers on both models, and confirm local short-term-rental ordinances before counting on that treatment.

Frequently asked questions

What depreciation life does an ADU use?

27.5 years as a residential rental — the same as any other single-family or multifamily rental unit.

Can I depreciate the whole house if I only rent the ADU?

No. You depreciate only the portion of the structure attributable to the rental ADU, typically based on square footage.

Does adding an ADU affect depreciation on the main house?

If the main house is already a rental, adding an ADU is a capital improvement that goes on a new depreciation schedule. If the main house is your primary residence, only the ADU portion is depreciable.

Can I use bonus depreciation or cost segregation on an ADU?

Yes. A cost segregation study can reclassify appliances, fixtures, and site work into 5-, 7-, and 15-year components, which are eligible for bonus depreciation. Under current law, 100% bonus applies to qualifying property placed in service after January 19, 2025, letting those components be deducted in year one, subject to the passive loss rules.

Does renting my ADU short-term change the tax treatment?

It can. If the average guest stay is 7 days or fewer and you materially participate, the ADU may be treated as non-passive, so its losses can offset active income without real estate professional status. But providing substantial guest services can subject the net income to self-employment tax.

What happens to ADU depreciation when I sell my home?

The sale is split between the primary-residence portion (potentially eligible for the Section 121 exclusion) and the rental ADU portion, which is fully taxable. Depreciation claimed on the ADU is recaptured — up to 25% for building depreciation, and at ordinary rates for any cost-segregated personal-property components.

How do I split shared expenses between my home and the ADU?

Costs that belong only to the ADU are fully deductible against rental income. Shared costs like a single water bill, insurance, or a roof repair covering both units are allocated by a reasonable method — usually square footage. Mortgage or HELOC interest is split between the rental ADU (Schedule E) and your residence (Schedule A) based on how the loan proceeds were used.

Sources

Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.

Depreciation for an Accessory Dwelling Unit (ADU)