In real estate, ADU means accessory dwelling unit: a smaller, self-contained second home on the same lot as a primary single-family house, with its own kitchen, bathroom, and separate entrance. You may see the same thing called a granny flat, in-law suite, backyard cottage, or carriage house. ADUs can produce rental income, add resale value, or house family, but they come wrapped in zoning rules, tax consequences, and financing quirks worth understanding before you build or buy one.
What an ADU Is
An ADU is a complete, independent living unit on a single-family lot. It has its own sleeping area, kitchen, bathroom, and entrance, and it operates separately from the main house. Legally, though, it is subordinate: it must be smaller than the primary residence and cannot be sold off on its own.
The Federal Housing Administration defines an ADU as a habitable living unit with its own entrance that is “subordinate in size and can be added to, created within, or detached from a primary one-unit Single Family dwelling.”1U.S. Department of Housing and Urban Development. FHA Single Family Housing Policy Handbook A home with one ADU still counts as a one-unit property for mortgage purposes, which keeps financing simpler than it would be for a true duplex or triplex.
Fannie Mae uses a similar definition and gives examples: a living area over a garage, a finished basement apartment, a small addition to the main home, or a manufactured home classified as real property.2Fannie Mae. Special Property Eligibility Considerations Whether a property is classified as a one-unit home with an ADU or as a multi-unit building depends on factors like separate utility meters, a unique mailing address, and whether the unit can be legally rented.
The Three Types of ADUs
ADUs come in three forms, defined by their physical relationship to the primary home:
- Detached: standalone structures such as backyard cottages, converted detached garages, or carriage houses.
- Attached: units that share at least one wall with the primary home, built as additions.
- Interior conversions: basements, attics, or attached garages repurposed into self-contained apartments inside the main structure.
Some jurisdictions also recognize a smaller category often called a junior ADU, or JADU. These are typically capped around 500 square feet, must sit within the existing home’s footprint, and may share a bathroom with the main house. Because they are smaller and use existing space, JADUs often face lighter regulation and lower construction costs than full ADUs.
Zoning, Permits, and Local Limits
Nearly every meaningful rule about ADUs lives in local zoning and building codes, so your municipality’s planning department is the first place to go. A few patterns are common across the country.
Many jurisdictions cap ADU size at roughly 1,200 square feet, and some tie the maximum to a percentage of the primary home’s floor area, often around 50%. Height limits typically range from 16 to 25 feet depending on whether the unit is detached, attached, or built above a garage. Setback distances between the ADU and the property line vary and often differ from the setbacks applied to the main house. Historic districts and environmentally sensitive areas layer in extra review.
Parking
Many cities waive off-street parking requirements for ADUs within a half mile of public transit. Where parking is required, it is usually one additional space. Interior conversions and JADUs that don’t change the home’s exterior are frequently exempt entirely. Parking rules are among the most jurisdiction-specific pieces of ADU regulation, so verify yours before assuming anything.
Fees
Total permit and plan-check fees generally run from a few thousand dollars to $25,000 or more depending on location and project complexity. Some areas also charge development impact fees for larger ADUs while exempting smaller units below a square-footage threshold. Fee schedules change often; ask the planning office for a current one before you finalize a budget.
Rules on Owning and Renting an ADU
ADUs come with legal strings on how you can use and dispose of them:
- No separate sale. Virtually all jurisdictions require the ADU to stay on the same title as the primary home. You cannot subdivide the lot and sell the ADU alone.
- Owner-occupancy. Many local codes require the owner to live in either the main house or the ADU, which prevents the whole property from becoming an absentee-owned rental.
- Short-term rental bans. Most places prohibit using an ADU as a vacation rental. Minimum lease terms of 30 days are common, and some areas require a full year.
Violating any of these can trigger fines, permit revocation, or both.
Homeowners’ associations add another layer. Some states have passed laws preventing HOAs from banning ADUs outright, overriding private deed restrictions. Others leave HOAs free to prohibit them. If your property sits in an HOA community, check both your state’s ADU law and your HOA’s covenants before paying for design work.
What an ADU Does to Property Value and Taxes
An ADU generally raises market value because buyers will pay more for rental potential or flexible living space. Fannie Mae requires appraisers to describe any ADU on the property and analyze its effect on value and marketability.3Fannie Mae. Improvements Section of the Appraisal Report The ADU’s living area is reported separately from the primary home’s square footage rather than lumped together, so its contribution is evaluated on its own.
Building an ADU typically triggers a reassessment, but only of the new construction, not the existing home. The assessor adds the ADU’s assessed value to your current assessment, which raises your annual property tax bill. If an ADU adds $150,000 in assessed value and your local tax rate is 1%, that is roughly $1,500 more per year. The actual number depends on your jurisdiction’s assessment method and any caps on annual increases.
Taxes When You Rent It Out
Rental income from an ADU is taxable. You report it, along with expenses, on Schedule E of your federal return.4Internal Revenue Service. 2025 Instructions for Schedule E (Form 1040) A number of expenses can offset that income:
- Mortgage interest allocable to the ADU
- Property taxes allocable to the ADU
- Insurance
- Repairs and maintenance (fixing a broken lock or repainting counts; improvements that add value do not)
- Utilities
- Depreciation
Depreciation is often the largest deduction. For residential rental property, the IRS requires straight-line depreciation over a 27.5-year recovery period, meaning you deduct a fraction of the ADU’s construction cost each year.5Internal Revenue Service. Publication 527 (2024), Residential Rental Property Only the structure is depreciable; land is not.
If deductible expenses exceed rental income, the resulting loss is generally passive and can only offset other passive income. If you actively manage the rental and your adjusted gross income falls below certain thresholds, you may deduct up to $25,000 in passive rental losses against ordinary income.4Internal Revenue Service. 2025 Instructions for Schedule E (Form 1040) That allowance phases out as income rises.
One exception worth knowing: if you rent the ADU fewer than 15 days during the year, you don’t report the income, but you also can’t deduct rental expenses for those days. If you use the ADU personally for part of the year and rent it out for another part, expenses must be divided between the two uses based on days.6Internal Revenue Service. Topic No. 415, Renting Residential and Vacation Property Rental income may also be subject to the net investment income tax.
How People Pay for ADU Construction
Several loan products can finance an ADU, each with its own rules.
FHA Loans
FHA-insured mortgages, including the 203(k) Rehabilitation Mortgage Insurance Program, can fund ADU construction.1U.S. Department of Housing and Urban Development. FHA Single Family Housing Policy Handbook A 203(k) loan wraps the cost of building or converting an ADU into a single mortgage tied to a purchase or refinance.
FHA also lets lenders count ADU rental income when qualifying a borrower, using 75% of the lesser of appraised fair market rent or the actual lease amount. The ADU rental income counted this way cannot exceed 30% of the borrower’s total qualifying income.1U.S. Department of Housing and Urban Development. FHA Single Family Housing Policy Handbook
Conventional Loans
Fannie Mae treats a single-family home with one ADU as a one-unit property, so standard conventional loan terms apply rather than the stricter rules for multi-unit buildings.2Fannie Mae. Special Property Eligibility Considerations Fannie Mae also allows lenders to count ADU rental income toward qualification, similarly capped at 30% of total qualifying income.
Home Equity Loans and HELOCs
If you already own the home and have built equity, a home equity loan or home equity line of credit can fund construction. Because your home is the collateral, rates are usually lower than on unsecured loans. A HELOC gives you a revolving line to draw from as costs come up, which helps with phased building. The risk is the same one that applies to any loan secured by your home: default puts the property on the line.
Typical Construction Costs
Costs swing widely by location, unit type, and local labor and material markets. In rough order:
- Interior conversions of a basement or garage usually cost the least, because the shell already exists.
- Attached additions fall in the middle, since they require new construction but share a wall and sometimes a foundation.
- Detached new construction is the most expensive, with total project costs typically running $150 to $300 or more per square foot once design, site prep, and utility connections are included.
Beyond hard construction, budget for permit and plan-check fees, architectural or engineering drawings, utility hookups, and any impact fees. Those soft costs can add thousands to tens of thousands to the total. Get multiple contractor bids and ask for a detailed line-item breakdown before signing.
Building Code Issues That Catch Owners Off Guard
ADUs must meet the same building codes as any residential structure. A few requirements regularly surprise homeowners:
- Fire separation. When an ADU shares a wall with the main home, codes typically require at least a one-hour fire-resistance-rated wall assembly between the two. Adding a residential sprinkler system may drop that to a half-hour rating.
- Separate utilities. Some jurisdictions require separate meters for the ADU; others allow submetering or shared connections. Rules on reselling electricity to a tenant through a submeter vary, and some places prohibit it. Check with the local utility before deciding.
- Egress. The ADU needs its own entrance, and bedrooms need emergency egress windows or doors that meet minimum size requirements.
- Energy codes. Depending on jurisdiction, a newly built detached ADU may need to meet current energy efficiency standards, including insulation upgrades or solar-ready wiring.
Meeting these requirements adds to construction cost but is not optional for permit approval. A contractor who has built ADUs in your city will see these issues coming at the design stage rather than at inspection.