Unsplash
What Are the Local and State Financial Incentives for an ADU?
Building an Accessory Dwelling Unit (ADU) can be a smart way to increase property value and address housing needs. However, the initial costs of construction can be high, which may deter some homeowners. To help with these costs, local and state governments offer various financial incentives. These incentives can include grants and low-interest loans that can make building an ADU more affordable. Local programs may cover specific fees, like permit costs, while state incentives might offer broader financial support or tax benefits. Understanding how local and state financial incentives work and what support is available can help you take advantage of these opportunities to make your ADU project more cost-effective.
The CalHFA ADU Grant Program Explained
The CalHFA ADU Grant Program helps Californians build extra living spaces, known as Accessory Dwelling Units (ADUs). These ADUs, sometimes called granny flats or in-law units, offer an affordable way to add more housing, especially in areas with high demand.
Here’s how it works: CalHFA provides grants of up to $40,000 to cover the costs of building an ADU. This includes expenses like preparing the land, designing the unit, getting permits, testing the soil, paying fees, surveying the property, and conducting energy reports. These upfront costs can be high, which might discourage some from starting their ADU project.
By offering this financial help, the program makes it easier for homeowners to build ADUs. This not only supports the creation of more housing but also helps address the state’s housing shortage and makes housing more affordable.
To get the grant, you need to apply and meet CalHFA’s income requirements. If approved, you can use the grant money for the initial costs. It’s important to follow the program rules and possibly work with specific contractors to ensure everything is done correctly.
Here's a closer look at the process:
Eligibility Criteria
- Homeowners must meet certain income limits set by CalHFA.
- The grant can cover costs such as architectural designs, permits, soil tests, impact fees, property surveys, energy reports, and utility hookups.
Application
- Apply for a construction loan through a CalHFA-approved lender. This loan will cover the costs of building the ADU.
- Pre-development costs are included in the loan, so you don’t need to pay these upfront.
- Complete the necessary forms for the ADU grant during the loan application process.
Loan Approval
- The lender reviews and approves the construction loan if criteria are met.
- The lender also checks if you qualify for the ADU grant.
Pre-Development
- After loan approval, start pre-development activities such as obtaining designs, permits, and testing soil.
- These costs are paid from the construction loan.
ADU Grant Application
- The lender submits the ADU grant application to CalHFA, including a detailed cost breakdown and supporting invoices.
Grant Disbursement
- CalHFA reviews the application and, if approved, sends the grant funds directly to the loan account.
- This reduces the loan amount you need to repay, lowering overall costs.
Construction
- With funding secured, begin building the ADU using the construction loan funds to cover materials, labor, and other expenses.
Loan Options and Local Incentives in California
Home Equity Line of Credit (HELOC)
Description. A HELOC is a type of credit that lets homeowners borrow money against their home’s value. It works like a credit card: you can borrow money as needed and only pay interest on the amount you use.
Relation to Incentives. Some local governments offer special HELOCs for building ADUs. These programs might provide benefits like lower interest rates or flexible repayment options to encourage homeowners to build ADUs and help with the housing shortage.
Home Equity Loan
Description. A home equity loan, also called a second mortgage, gives you a lump sum of money upfront that you pay back over time with a fixed interest rate.
Relation to Incentives. Local or state programs may include home equity loans for ADU projects. These programs might offer help like lower interest rates or grants to make it easier for homeowners to finance ADUs.
Cash-Out Refinance
Description. A cash-out refinance replaces your existing mortgage with a new one for a larger amount, allowing you to get cash based on your home’s value.
Relation to Incentives. State or local programs might offer cash-out refinance options to encourage homeowners to build ADUs. These programs may provide competitive rates or other benefits to help with the costs of refinancing and fund ADU projects.
Construction Loan
Description. A construction loan is used specifically for building or renovating properties, including ADUs. The money is given out in stages as the work progresses, and interest rates may vary during construction.
Relation to Incentives. Some local governments offer construction loans designed for ADUs. These programs might make it easier to apply, provide lower interest rates, or offer grants to help with construction costs.
Renovation Loan (203K or Homestyle)
Description. Renovation loans, such as FHA 203(k) or Fannie Mae Homestyle, combine the cost of buying or refinancing a home with funds for renovations, including building ADUs.
Relation to Incentives. State or local programs might include renovation loans aimed at ADUs. These programs may offer benefits like low down payments or subsidized interest rates to encourage homeowners to invest in ADUs and make housing more affordable.
Local and State Financial Incentives in California
Local Financial Incentives
Local cities have programs that waive certain fees to encourage building ADUs. These programs often remove fees for things like fire protection, parks, and development impacts. By cutting these costs, local governments help homeowners afford ADU projects, which in turn increases the number of available housing units in the community. These programs show that cities are committed to solving housing issues like affordability and availability by supporting ADU construction.
State Financial Incentives
At the state level, programs like SB13 provide additional support. SB13 waives fees for ADUs that are under 750 square feet. This state law helps make ADU construction more financially appealing. Local fee waiver programs work alongside these state incentives to further promote ADU development. Together, local and state efforts create a unified approach to boosting ADU construction and tackling housing challenges across California.
ADUs are a great way to add value to your property. Find out how much.
Are You Maximizing ADU Benefits? Understanding Taxes and Incentives in California
In California, homeowners are looking at Accessory Dwelling Units (ADUs) as a way to address high real estate prices and property taxes. This guide helps explain how ADUs impact taxes and how to use available incentives to your advantage.
Impact on Property Taxes
Adding an ADU usually increases property taxes, but it doesn’t change the taxes on your main home. The tax assessor combines the ADU’s value with the existing property value. Property taxes on ADUs generally range from 1-1.5% of the construction cost.
Timing of Tax Assessment
The value of the ADU is assessed on January 1st each year. Changes to property taxes based on this assessment may take up to a year to show up on your tax bill.
Impact on Personal Taxes
Building an ADU raises the property value, affecting property taxes. If you use the ADU for rental income or as office space, you might be able to get tax deductions or credits.
Capital Gains Tax and Depreciation
Selling a property with an ADU might have tax benefits compared to selling separate investment properties. Capital gains tax is based on the selling price of the property minus the tax basis.
Yearly Tax Deductions
If you run a business from the ADU, you might be able to deduct costs for depreciation and construction.
Importance of Insurance
You should update your insurance policy to cover the ADU. Standard policies might not cover new constructions or renovations without adjustment.
ADU Tax Benefits
Rental income from the ADU can help cover additional property taxes. Some cities and states offer tax incentives for building ADUs, which can include benefits for mortgage interest, property repairs, and rental advertising.
Understanding Tax Incentives, Rebates, and Loan Assistance for ADU Construction
Tax Incentives and Rebates for ADUs
Explanation
Tax incentives and rebates are financial benefits from the government to encourage building Accessory Dwelling Units (ADUs). These can include:
- Tax credits: Reduce the amount of taxes you owe.
- Property tax exemptions: Remove property taxes for ADUs, lowering your ongoing costs.
- Grants: Provide money that you don’t have to pay back.
- Loans: Offer borrowed money at lower interest rates to help with construction costs.
- Energy-efficient incentives: Reward you for including eco-friendly features in your ADU.
- Additional rental income: Provide extra revenue if you rent out the ADU.
Purpose
These benefits aim to make building an ADU more affordable, increase the number of affordable housing options, and address local housing shortages.
Loan Assistance for ADU Construction
Explanation
Some states offer special loan programs to help with ADU construction. These loans often come with lower interest rates than standard loans.
Purpose
The goal is to help homeowners manage the costs of building an ADU and encourage more people to add these units to their properties.
Example
In Washington State, a program provides low-interest loans to help with ADU construction costs, making it easier for homeowners to start and complete their projects without high borrowing costs.
Wondering about the potential earnings from adding an ADU to your property?
The Plus One ADU Program Explained
The Plus One ADU Program helps homeowners in New York State build or convert Accessory Dwelling Units (ADUs) on their properties. These units can be used for extra housing or as rental units to earn additional income. Here’s how the program works:
Program Overview
The Plus One ADU Program offers low or no-interest loans and construction grants to eligible homeowners. These funds are managed by the New York State Homes and Community Renewal with help from Restored Homes HDFC.
Eligibility Criteria
- Homeowners must earn up to 165% of the Area Median Income (AMI), with preference given to those at or below 100% AMI.
- Must be owner-occupants of one-unit, single-family detached residential homes.
- Homes must allow for two-family construction under existing building and zoning codes.
- Must be current on existing mortgages and have no outstanding municipal arrears or active payment plans.
- Homes must pass a housing quality inspection and require no major repairs other than those essential to ADU construction.
Eligible Buildings
- One-unit, single-family detached residential homes.
- Homes that allow for two-family construction under existing building and zoning codes.
- Homes must be free of housing or building code violations before receiving program financing.
ADU Typologies
- Attached or detached existing structures or newly constructed structures.
- Basement or attic unit conversions.
How to Apply
- The program started on November 21, 2023, and the application period ended on February 13, 2024.
- While this application period is closed, homeowners can sign up for updates on future ADU initiatives, including the City of Yes for Housing Opportunity, which aims to update zoning regulations.