A detached accessory dwelling unit, or DADU, is a stand-alone residential structure built on the same lot as a single-family home. It has its own kitchen, bathroom, and sleeping area, and unlike a basement apartment or garage conversion, it shares no walls with the main house. Depending on where you live, you may hear the same thing called a backyard cottage, granny flat, laneway house, or casita.1HUD USER. Accessory Dwelling Units (ADUs)
How a DADU Differs From Other ADUs
Accessory dwelling units come in three forms. An internal ADU is carved out of existing space inside the main home, such as a finished basement with its own entrance. An attached ADU shares at least one wall with the primary residence, like a garage conversion or a bump-out addition. A DADU shares no walls at all. It sits separately on the lot, often in the backyard, and functions as a completely independent structure.1HUD USER. Accessory Dwelling Units (ADUs)
That physical gap matters. A DADU offers real sound separation, which makes it more appealing to long-term tenants and more livable for aging parents who want proximity without shared walls. It also gives you design flexibility, because the structure doesn’t need to integrate with the main house’s roofline, foundation, or floor plan. You can orient it toward a garden, position it for privacy, or face it to maximize natural light.
The tradeoff is cost. Running utilities across your lot to a separate building is more expensive than tapping into existing plumbing and electrical at a shared wall. A DADU also needs its own foundation and complete exterior envelope, which pushes construction costs above most attached or internal conversions.
Why Homeowners Build Them
Rental income is the most common reason. A unit with its own entrance and no shared walls commands higher rent than a basement apartment, and tenants treat it more like a real home. The math depends on your local rental market and construction costs, but the income can meaningfully offset a mortgage payment.
Multi-generational living is close behind. A DADU lets an aging parent or adult child live on the property with genuine independence. Everyone has their own kitchen, their own front door, and enough distance that daily routines don’t collide. Some homeowners also build one as a long-term play on property value, or use it as a home office or guest house with the option to convert to a rental later.
What a DADU Costs to Build
Construction typically runs between $150 and $300 per square foot, though custom builds in high-cost metros can reach $600 or more. For a 600-square-foot unit at the middle of that range, you’re looking at roughly $135,000 to $180,000 in construction costs alone.
Several line items get added on top:
- Permit and impact fees, which vary from a few hundred dollars to several thousand depending on the jurisdiction. Some localities have waived or reduced impact fees for ADUs; others charge them at the same rate as a new single-family home.
- Site preparation, including grading, tree removal, and soil work.
- Utility connections. Running separate sewer, water, electrical, and gas lines to a detached structure is one of the biggest cost differences between a DADU and an attached ADU, and can range from a few thousand dollars to over $20,000 depending on distance and local requirements.
- Design and engineering, typically $5,000 to $15,000 for architectural plans and structural engineering.
All-in, most DADUs land between $150,000 and $300,000, with simple prefabricated units below that and high-end custom builds above it.
Zoning and Building Rules
Every jurisdiction handles ADUs differently, so these are common patterns rather than universal requirements. Checking your local zoning code is the single most important step before spending money on plans.
Size, Setbacks, and Height
Local codes usually cap DADU size, often between 600 and 1,200 square feet, with the exact limit tied to lot size or set as a percentage of the primary home’s square footage. Setback requirements dictate how far the structure must sit from property lines and are often stricter for detached buildings than for additions. Height is typically limited to one or one-and-a-half stories.
Permitting
Building a DADU generally requires two rounds of approval. First, confirmation that the project meets zoning requirements for size, location, and setbacks. Second, a building permit covering structural details, electrical and plumbing work, and fire safety. Some jurisdictions combine the two into one application, but the review still addresses both.
Owner-Occupancy, Rentals, and HOAs
Some localities require the owner to live in either the main house or the DADU. Others have dropped that requirement, and a growing number of states prohibit local governments from imposing it. Short-term rental rules are a separate layer: many jurisdictions restrict or ban using ADUs as vacation rentals while allowing long-term leases. If you’re building specifically for short-term rental income, verify the rules before committing.
If you live in a community governed by a homeowners association, CC&Rs may restrict ADU construction even where local zoning allows it. Several states have passed laws preventing HOAs from outright prohibiting ADUs, though HOAs can still impose reasonable design requirements like matching exterior materials. If your state hasn’t acted, HOA rules can effectively block the project regardless of zoning.
Financing
Few homeowners pay cash. The right financing depends on how much equity you have and whether you’re buying, refinancing, or borrowing against a home you already own.
A home equity loan or HELOC is the most straightforward path if you have substantial equity. The loan delivers a lump sum at a fixed rate; the line of credit lets you draw as construction progresses, which better matches how contractors bill. Interest is generally tax-deductible when the funds are used to build or substantially improve the property securing the loan.
If you don’t have existing equity, Freddie Mac’s CHOICERenovation mortgage lets you roll ADU construction costs into a purchase or refinance loan. The program allows one ADU on one-, two-, and three-unit properties, and the unit must comply with local zoning. A no-cash-out refinance can also pay off short-term construction financing after the DADU is complete.2Freddie Mac Single-Family. Accessory Dwelling Units
Fannie Mae allows lenders to count projected ADU rental income when qualifying you for a mortgage, capped so that the ADU income can’t exceed 30% of your total qualifying income. This applies to purchase or limited cash-out refinance transactions on a one-unit principal residence, and the lender multiplies estimated gross rent by 75% to account for vacancies and maintenance.3Fannie Mae. Rental Income
Taxes If You Rent It Out
Rental income from a DADU is taxable, and the IRS treats it like any other residential rental property. You report income and expenses on Schedule E of your Form 1040. Deductible expenses include repairs, property management costs, insurance, and the portion of property taxes attributable to the DADU.4Internal Revenue Service. Publication 527 (2025), Residential Rental Property
You can also depreciate the DADU’s construction cost (not the land) over 27.5 years. On a $200,000 structure, that works out to roughly $7,270 per year in depreciation deductions.4Internal Revenue Service. Publication 527 (2025), Residential Rental Property
Rental losses are generally passive, meaning they can only offset other passive income. But if you actively participate in managing the rental, which most DADU owners do since they live on the same property, you can deduct up to $25,000 in rental losses against regular income. That allowance phases out once modified adjusted gross income exceeds $100,000 and disappears entirely at $150,000.5Internal Revenue Service. Publication 925 (2025), Passive Activity and At-Risk Rules
Two things to plan for from day one. First, the DADU adds assessed value to your property, which raises your property tax bill. A DADU assessed at $150,000 in a jurisdiction with a 1.2% tax rate would add about $1,800 per year. Build that into your rental income projections. Second, when you eventually sell, the depreciation you claimed on the DADU gets “recaptured” and taxed as ordinary income at a rate of up to 25%, and the portion of the sale gain attributable to the rental doesn’t qualify for the usual principal-residence capital gains exclusion.6Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence The annual depreciation deduction is real, but the bill at sale is also real.
Insurance
Standard homeowners insurance covers detached structures under its “other structures” provision, but that coverage is usually capped at around 10% of your dwelling coverage. On a home insured at $400,000, that’s only $40,000 for the DADU, which almost certainly won’t rebuild a structure that cost $150,000 or more to construct.
Renting the unit widens the gap. Standard policies typically exclude tenant-related liability and lost rental income. Before the first tenant moves in, talk to your insurer about three fixes:
- Raising the other-structures limit to match the DADU’s actual replacement cost.
- Adding a landlord or rental property endorsement for tenant-related property damage, liability claims, and lost rental income if a covered event makes the unit uninhabitable.
- An umbrella policy for excess liability coverage above your homeowners and landlord limits, which is worth considering with tenants on your property.
Some insurers prefer to write a separate landlord policy for the DADU rather than endorse your existing homeowners policy. Either approach works as long as the coverage limits reflect replacement cost and rental exposure. Get quotes for both and compare the total premium.