Tax Implications of Building an ADU in Atlanta

If you're considering adding an accessory dwelling unit (ADU) to your home, there's a lot you'll come to love. Not only do ADUs improve your property value and provide more space for your family, but they also offer more flexibility and, perhaps best of all, if you plan it right, more income. 

However, before you can get to the ‘loving your ADU bit,’ you need to navigate more than the construction costs and design. You also need to understand the tax implications of building an ADU. Fortunately, we have shared a few key tax rules for ADUs alongside the tax implications of accessory dwelling units so that you can go into your build wholeheartedly with the big picture in mind. 

So without further ado, let's learn how an ADU can impact your income taxes, property taxes, and potential deductions. 

How Does Building an ADU Affect My Property Tax in Atlanta?

At SmartSpaces ADUs, one of the most common questions we're asked is 'Does an ADU increase property tax?' Unfortunately, the answer is yes. However, although this might not be the answer you want to hear, it shouldn't stop you from building, because in Atlanta, GA, your property taxes are based on the actual assessed value of your Atlanta home. This means that adding livable square footage will increase the property's value. 

With this in mind, your follow-up questions are likely 'How much will my taxes go up if I build an addition like an ADU?' or 'Will an ADU increase property tax significantly?' The answer to these questions can be tricky. The amount by which your taxes will increase will depend on the cost and scope of your project. 

For example, a modest backyard studio will likely not increase your property value as much as a two-bedroom fully detached ADU. Additionally, the increase, whatever it may be, is generally reasonable and often well offset by rental income if you choose to lease the unit.

Can I Depreciate an ADU on My Georgia Taxes?

Another common question we receive regarding tax implications for ADUs is whether a homeowner can depreciate an ADU on their Georgia tax return. If this is a question on your mind, you may be pleased to know that you can potentially depreciate the unit as a residential rental property. 

The IRS allows rental property owners to recover the cost of the building (not the land) over time, typically over 27.5 years. This can drastically reduce your taxable rental income each year. If it is not already part of your tax planning for an ADU in Atlanta, GA, it's best to add it to your checklist for reducing your overall tax burden. 

Just be sure to keep good records and consult a tax professional to understand how depreciation fits into your bigger financial picture.

Are There Georgia State Tax Credits or Incentives for ADUs?

We truly hate to be the proverbial bearer of bad news, but currently, there are no statewide tax credits for ADUs in Atlanta, GA. However, this doesn't mean you're out of luck. At times, homeowner tax incentive ADU programs exist at the local level, especially for those whose ADU serves a specific purpose, such as providing affordable housing. 

You should also check with your accountant about tax write-offs for ADU construction. While credits are rare, many construction-related costs may be eligible for deductions over time if the unit will be used as a rental.

Additionally, even without specific state credits, building an ADU can lead to long-term financial gains through accessory unit income, tax-deductible expenses, and appreciation.

How Is ADU Rental Income Taxed in Atlanta?

If you plan to generate ADU rental income, that income must be reported on both your federal and Georgia state tax returns. How ADU rental income is taxed depends on your use. 

If you rent it full-time, it is treated as investment property. If it's only rented occasionally, or shared with family part of the year, different rules may apply. Either way, you'll likely need to pay income taxes, but you can also deduct many of the related expenses.

You should also be aware that if you're offering ADUs for short-term rent (such as through Airbnb), you may be subject to hotel taxes and other regulations. 

What Tax Deductions Are Available for ADU Owners?

We admit that having to pay taxes on an ADU can be frustrating. Even though there is no way to get around this for the most part, there are several tax deductions for ADU owners that can help reduce your taxable income. These include:

• Mortgage interest related to the ADU loan.
• Repairs and maintenance expenses.
• Utilities paid by the homeowner.
• Depreciation for the structure.
• Insurance costs.
• Property tax allocated to the ADU.

If you're using the unit for income, you may also qualify for deductions for building an ADU in Atlanta, particularly for expenses such as design, permits, and materials. These deductions do not apply if the unit is used solely for personal purposes.

Build Smart, Plan Smart, Earn Smart

At SmartSpaces, we're builders, but we're also your ADU experts in Atlanta. We can offer rudimentary guidance on tax savings for ADU owners in Atlanta and help you build an ADU based on your needs and preferences. We help you understand how your unit will impact your taxes, your property value, and your potential income. 

If you're exploring tax advice for ADU rentals or simply want to learn more about the financial aspects of building, or are ready to start your project, we're here to help. Contact SmartSpaces ADUs today to schedule a consultation and start building your ADU.