An accessory dwelling unit, often called an ADU, is a secondary self-contained home built on the same lot as a single-family house. Accessory dwelling units have their own kitchen, bathroom, and exterior entrance, but they remain legally part of the primary property and share one deed with the main home. Cities have been loosening the rules around them to add housing without changing neighborhood character, and homeowners build them for rental income or to house family.
The names vary — granny flat, in-law suite, backyard cottage, casita — but the defining feature is the same: a complete, independent residence sharing a lot with a primary dwelling.
The Main Types
Detached
A standalone structure, usually in the backyard or built above a detached garage. It gives everyone the most privacy because the homeowner and the occupant each have their own building. It also costs the most. Because a detached unit needs its own foundation, roof, walls, and utility connections, construction typically runs between $150,000 and $300,000 or more depending on size, finishes, and local labor rates.
Attached
Shares at least one wall with the main house. Common versions include garage conversions, bump-out additions, and new wings on the side or rear. Fire separation is fundamental: most building codes call for at least a one-hour fire-rated assembly between the unit and the main house. Attached units also need their own heating, ventilation, and utility shutoffs to function as genuinely independent living spaces.
Interior Conversion
Turning an existing basement, attic, or large room into a unit is usually the cheapest route because the footprint doesn’t change. The space has to meet habitability standards it probably wasn’t designed for, though. Ceiling height is the most common deal-breaker. Most codes require at least seven feet of clear height in habitable rooms, with some jurisdictions requiring seven and a half. Basements also need adequate natural light, emergency egress windows, and moisture management.
Junior ADU
A smaller version, capped at 500 square feet and contained entirely within the existing walls of the single-family home. Junior units can share a bathroom with the main house and only need an efficiency kitchen: a small sink, a cooking appliance, and a compact refrigerator. Some states have written specific legal frameworks for these with streamlined permitting, which makes them an accessible entry point for homeowners who want a rental unit without major construction.
Prefabricated or Modular
Factory-built units ship to your property in panels or fully assembled modules. Prefabricated units generally cost 10 to 20 percent less than comparable site-built construction, and factory work runs in parallel with site preparation, which shaves weeks or months off the timeline. The tradeoff is flexibility — you’re picking from a manufacturer’s catalog, and tight access, steep slopes, or unusual setbacks can complicate delivery.
What Makes a Unit Legal
For a space to qualify as a lawful dwelling unit, it has to provide the essentials of independent living: somewhere to sleep, cook, eat, and bathe. Building codes are specific about what counts.
The kitchen needs a permanent sink with hot and cold running water, a stove or built-in cooktop, and refrigeration. An inspector will look for each of them. The electrical panel feeding the unit also needs enough capacity to support those appliances safely. Many older homes have 100-amp or 150-amp service, and adding a second kitchen, water heater, and HVAC system often pushes the load past what the existing panel can handle, which forces an upgrade.
The bathroom needs a toilet, sink, and either a shower or bathtub in an enclosed, ventilated space. All plumbing has to tie into the property’s sewer line or septic system, and the system needs to be rated for the increased capacity of a second household. In areas without municipal sewer service, a septic evaluation is often required before permits are issued.
Every unit also needs its own exterior entrance: a door that opens directly to the outside without routing anyone through the main home. That entrance has to meet egress requirements for width, clearance, and lighting. The independent entrance is what turns a room addition into a genuine dwelling unit.
Zoning Rules That Decide What You Can Build
Setbacks and Placement
Setbacks control how close the unit can sit to property lines. Most jurisdictions require at least four feet from side and rear lot lines for detached and attached units, though some areas require up to ten. Interior conversions generally don’t trigger new setback requirements because the building footprint isn’t changing.
Size Limits
Nearly every jurisdiction caps how large an accessory unit can be. Common approaches include a flat maximum (often 800 to 1,200 square feet), a percentage of the main home’s floor area (frequently 50 percent), or whichever figure is smaller. Some areas also set minimum sizes around 200 to 300 square feet. Height restrictions are separate; detached units are commonly limited to one or one-and-a-half stories.
Parking
Some jurisdictions require one additional off-street parking space per accessory unit. The requirement is frequently waived when the unit is within a half-mile of public transit, located on a historic property, or near a car-share vehicle. The recent trend has been toward eliminating parking mandates for these units entirely, since forcing a new parking space can make a project financially or physically impossible on a small lot.
How Ownership and Taxes Work
An accessory dwelling unit is not a separate piece of real estate. The main house and the secondary unit share one property deed and count as a single integrated asset, so you cannot sell the unit independently from the primary home.1U.S. Department of Housing and Urban Development. Mortgagee Letter 2023-17 – Revisions to Rental Income Policies, Property Eligibility, and Appraisal Protocols for Accessory Dwelling Units Any mortgage or lien on the property covers both structures, and the unit doesn’t get its own tax parcel number or legal description.
Many jurisdictions attach deed restrictions or recorded covenants to properties with accessory units. The most common requirement is owner-occupancy: the owner has to live in either the main house or the unit. Some covenants run with the land indefinitely, binding all future owners; others expire after a set period. Violating these restrictions can mean fines or the loss of the unit’s certificate of occupancy. If you’re buying a property with an existing unit, read the recorded covenant first.
Adding a unit raises your assessed value because the assessor treats it as a capital improvement. Expect a supplemental tax bill after construction is complete and the property is reassessed. Homeowners routinely underestimate this. A $200,000 detached unit can add several thousand dollars per year in property taxes depending on local rates.
On the upside, an accessory unit can increase what the home sells for. Appraisers look at comparable sales of properties with units in your market, and in neighborhoods where these units are common, the rental income potential tends to be reflected in the sale price. FHA guidelines now let lenders count rental income from an accessory unit when qualifying a borrower for a mortgage.1U.S. Department of Housing and Urban Development. Mortgagee Letter 2023-17 – Revisions to Rental Income Policies, Property Eligibility, and Appraisal Protocols for Accessory Dwelling Units
Paying for It
Most homeowners don’t pay cash for a unit that easily reaches six figures. Three financing paths cover most projects.
An FHA 203(k) loan rolls renovation or construction costs into your mortgage. The Standard 203(k) supports major structural work, including a new detached unit, as long as rehabilitation costs are at least $5,000 and the total property value stays within FHA loan limits for your area. The Limited 203(k) covers up to $75,000 in improvements, which may work for an interior conversion or an attached addition but won’t stretch to a standalone building.2U.S. Department of Housing and Urban Development. 203(k) Rehabilitation Mortgage Insurance Program Types
Fannie Mae’s HomeStyle Renovation loan explicitly lists accessory dwelling units as eligible projects. On a purchase, the total loan amount can reach 75 percent of either the purchase price plus renovation costs or the as-completed appraised value, whichever is lower.3Fannie Mae. HomeStyle Renovation
Home equity lines of credit and home equity loans let you borrow against existing equity without refinancing your primary mortgage. That matters if you locked in a low rate in earlier years, because a 203(k) or HomeStyle loan replaces that rate. Equity products usually carry higher interest than first-lien mortgages, and your borrowing limit depends on how much equity you have, but for homeowners with substantial equity and a favorable existing rate, this route often makes the most sense.
Renting It Out
Rental income from an accessory unit is taxable and goes on Schedule E of your federal return. You can deduct the mortgage interest allocable to the unit, property taxes, insurance, maintenance, utilities, and depreciation of the structure itself.4Internal Revenue Service. Topic No 415, Renting Residential and Vacation Property Depreciation is the deduction most homeowners overlook. The IRS lets you write off the cost of the unit’s structure (not the land) over 27.5 years, which can meaningfully reduce taxable rental income on paper.
One useful exception: if you rent the unit for fewer than 15 days in a calendar year, you don’t report the rental income and you don’t deduct rental expenses.4Internal Revenue Service. Topic No 415, Renting Residential and Vacation Property This rarely applies to a unit with a long-term tenant, but it’s worth knowing for occasional rentals.
If you use the unit for both personal and rental purposes in the same year, split expenses proportionally by the number of days devoted to each use. Rental expense deductions in that scenario are capped at your gross rental income, though excess deductions carry forward to the following year.4Internal Revenue Service. Topic No 415, Renting Residential and Vacation Property
Short-Term Rentals Are Often Restricted
Before listing the unit on a platform like Airbnb, check your local zoning rules. A growing number of municipalities either prohibit using accessory units as short-term rentals or impose registration and licensing requirements. The policy reasoning is that these units were authorized to add long-term housing supply, not vacation inventory. Violating short-term rental bans can bring fines and the loss of the unit’s operating permit.
Insurance You’ll Need to Add
Standard homeowners policies include coverage for “other structures,” but that coverage is usually capped at about 10 percent of your dwelling coverage. If your home is insured for $400,000, you have roughly $40,000 for other structures, which won’t rebuild a detached unit that cost $200,000. You’ll almost certainly need to raise other-structures coverage, add a rider, or buy a separate landlord policy for the unit.
Liability exposure also rises the moment someone outside your family lives on the property. If a tenant or their guest is injured in or around the unit, your standard liability may not be enough. Umbrella coverage, which adds liability protection above your homeowners or landlord policy limits, is worth serious consideration when a third party is renting. Tell your insurer the unit exists and is being rented. Failing to disclose can give them grounds to deny a claim.
Permits and Inspections
Building an accessory unit without permits is one of the most expensive mistakes a homeowner can make. Unpermitted units can’t legally be rented in most jurisdictions, create title complications when you sell, and may have to be demolished if they violate building or zoning codes. The sequence is consistent across most localities: submit plans to the planning or building department, get zoning approval confirming the project meets setback, size, and land-use rules, then obtain a building permit for the construction itself.
Fees vary widely. Administrative permit fees in many areas fall between $1,500 and $3,000, and impact fees meant to offset the burden a new dwelling puts on schools, parks, and water systems can add thousands more. Some jurisdictions have reduced or waived impact fees for accessory units to encourage construction, so ask your local planning department about current fee schedules before budgeting. Plan review and permitting typically run one to six months, longer when a project is complex or the jurisdiction is backlogged.
After construction, the unit has to pass a final inspection before it receives a certificate of occupancy. The inspector verifies that the work matches the approved plans and meets current building codes. Skipping that step, or assuming the contractor handled it, leaves you with a structure that technically can’t be occupied.