100% Bonus Depreciation Restored for 2025+ Under OBBBA

ADU Cost Segregation: Unlock Hidden Tax Deductions

ADUs often produce higher-than-average first-year deductions compared to traditional homes. Studies from $495, delivered in under 1 hour.

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18-25%

Typically Reclassified

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Why ADUs Produce Strong Cost Segregation Results

The construction profile of an ADU concentrates value in shorter-life components.

Higher Interior-to-Structure Ratio

ADUs are compact. Kitchens, bathrooms, and interior finishes make up a larger share of total construction cost compared to a full-size home. That means more of the basis falls into 5-year and 7-year categories.

Simpler Construction Profiles

Most ADUs have straightforward construction. Fewer building systems means each component is easier to isolate and classify into the correct MACRS recovery period.

Newer Construction

Most ADUs were built in the last several years, during the ADU boom. Properties placed in service in 2025 or later qualify for 100% bonus depreciation under the One Big Beautiful Bill Act.

STR Potential Amplifies Results

ADUs used as short-term rentals include furnishings, linens, and guest supplies — all 5-year property. A furnished ADU on Airbnb can push reclassification above 25%.

Compared to traditional homes, ADUs frequently fall on the higher end of cost segregation percentages. The compact footprint and finish-heavy construction concentrate value in accelerated categories. See typical percentages by property type.

Detached vs. Attached ADUs

Both types benefit from cost segregation. The structure affects how components are classified.

Detached ADU

Backyard cottage, casita, converted garage

Separate structure with its own foundation, walls, and roof
Depreciated independently on 27.5-year residential schedule
Full building shell counts toward depreciable basis
Site work (driveway, walkway, landscaping) qualifies as 15-year property

Typically 18-20% reclassified

Attached ADU

Garage conversion, basement unit, room addition

Shares structure with main dwelling, treated as part of the building
May use 27.5-year or 39-year schedule depending on rental use
Higher proportion of interior finishes relative to structure
Kitchen and bathroom buildout drives reclassification

Typically 20-25% reclassified

Both types benefit from cost segregation — the structure affects how components are classified, not whether they qualify.

Example: $150,000 Detached ADU in Los Angeles

How a backyard ADU produces a 20:1 return on a $495 study.

PropertyDetached ADU — Los Angeles, CA

Construction Cost$150,000

Land Allocation20% ($30,000)

Depreciable Basis$120,000

Study Cost$495

This detached ADU was built in 2024 and placed in service as a long-term rental. The study reclassified interior finishes (flooring, cabinetry, appliances, fixtures), site improvements (walkway, exterior lighting, landscaping), and mechanical components into accelerated MACRS categories.

Estimated Year 1 Tax Savings

$10,212

at the 37% federal bracket

$21,600

5-Year Property (18%)

$6,000

15-Year Property (5%)

$27,600

Total Accelerated

20:1

ROI on $495 Study

This is a representative example for illustration. Actual results vary based on construction details, location, and finishes. Full disclaimer

Already Built Your ADU?

If your ADU was placed in service in a prior year, you may still be able to claim missed depreciation using IRS Form 3115 (Change in Accounting Method). This allows you to catch up on all the accelerated depreciation you would have claimed if you had done a cost segregation study from day one.

No amended returns needed — the catch-up depreciation is taken as a single adjustment in the current tax year. Your CPA files the 3115 with that year's return. Learn more about what a study costs and how quickly you get your report.

This works even if your ADU is several years old. The IRS specifically permits a change in depreciation method via Form 3115, and your CPA can take the full cumulative adjustment in a single tax year.

Where ADU Construction Is Surging

ADU permitting has accelerated dramatically in states that have relaxed zoning restrictions. California alone issued over 20,000 ADU permits in 2023, driven by AB 68, SB 13, and subsequent legislation that removed barriers to construction. Oregon and Washington have followed with similar statewide ADU reforms.

This wave of new construction means most ADUs qualify for 100% bonus depreciation — the entire reclassified amount is deductible in Year 1. If you built an ADU in the last few years, the timing is right for a cost segregation study. See our guide to how cost segregation works.

Is This Right for Your ADU?

Cost segregation makes sense for most rental ADUs. Here is when it works best.

Your ADU is a rental property — long-term tenant, Airbnb, or VRBO. It is being depreciated on your tax return as rental or investment property.

Construction cost above $100K. Below $100K the study still pays for itself in most cases, but the savings are more modest.

You have taxable income to offset. Cost segregation produces deductions. Those deductions need taxable income — W-2, business, or passive rental income — to create real savings.

You plan to hold the property for 3+ years. Selling within a year or two triggers depreciation recapture, which can reduce the net benefit.

Frequently Asked Questions

Yes. Any ADU used as rental or investment property qualifies for cost segregation. Detached ADUs (backyard cottages, casitas, converted garages) and attached ADUs (garage conversions, basement units, room additions) both qualify. The ADU must be placed in service as a rental property and depreciated on your tax return.

Short-term rental ADUs often produce even higher cost segregation results because furnishings, linens, kitchen supplies, and guest amenities all qualify as 5-year personal property. If you materially participate in managing the STR, the resulting depreciation may offset your W-2 and active business income — not just passive rental income. See our short-term rental cost segregation guide.

The 80% test determines whether a property uses the 27.5-year residential schedule or the 39-year commercial schedule. If your ADU is rented to tenants (long-term or short-term) and meets the 80% residential use threshold, it qualifies for 27.5-year treatment. Most rental ADUs satisfy this easily.

For most ADUs with a construction cost above $100,000, the answer is yes. A $150K ADU can produce roughly $10,000 in Year 1 tax savings at the 37% bracket — a 20:1 return on a $495 study. Below $100K, the tax savings may be more modest, but the study still pays for itself in most cases. See how much a cost segregation study costs.

Yes. If your ADU was placed in service in a prior year and you used straight-line depreciation, you can file a Form 3115 (Change in Accounting Method) to catch up on all the accelerated depreciation you missed. The full catch-up amount is taken in a single tax year — no amended returns needed.

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