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.
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.
Sources
- IRS Publication 946 — How to Depreciate Property
- IRS Publication 527 — Residential Rental Property
- IRS Topic No. 701 — Sale of Your Home
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.