How the IRS generally treats a rented ADU
If you rent out your ADU to a tenant, the IRS generally treats that portion of your property as rental property, similar to any other residential rental. That means you can generally deduct ordinary and necessary rental expenses, and you're required to depreciate the structure over time rather than deducting its full cost upfront.
The basic depreciation framework
- 27.5-year recovery period. Residential rental property, including a rented ADU, is generally depreciated on a straight-line basis over 27.5 years under IRS rules.
- Depreciable basis excludes land. Your depreciable basis is generally the cost of the ADU structure plus qualifying capital improvements — land itself is never depreciable.
- Schedule E reporting. Rental income and expenses, including depreciation, are generally reported on IRS Schedule E (Supplemental Income and Loss), filed with your Form 1040.
What you can generally deduct
Beyond depreciation, common deductible expenses for a rented ADU can include a portion of mortgage interest, property taxes, insurance, utilities you pay, repairs and maintenance, and property management costs — generally prorated if the ADU shares systems or space with your main home. See our guide to how ADUs affect property taxes and ADU insurance guide for the underlying costs that may factor into these deductions.
The passive loss limitation to know about
Rental real estate losses, including the "paper losses" depreciation often creates in early years, are generally treated as passive losses under IRS rules. For many taxpayers, the IRS allows up to $25,000 of passive rental losses to be deducted against other, non-passive income each year — but this allowance generally phases out as your adjusted gross income rises, and phases out completely above a certain threshold. Whether you qualify for this allowance, and how much of it applies to your specific situation, depends on your full tax picture — this is exactly the kind of calculation a CPA should run for you.
This is general information, not tax advice
Tax rules are complex, change periodically, and depend heavily on your specific financial situation. This page describes the general framework the IRS applies to rental property, not a determination for your specific taxes. A CPA or tax professional should review your actual numbers before you file — some ADU owners may also benefit from more advanced strategies like a cost segregation study, which a tax professional can evaluate for your situation.
Frequently asked questions
Generally no — once you rent it out, a residential rental structure like an ADU is generally depreciated over 27.5 years under standard IRS rules, rather than deducted all at once. A CPA can tell you whether any accelerated depreciation strategies might apply to your specific project.
Rental income and expenses, including depreciation, are generally reported on IRS Schedule E, filed alongside your Form 1040. Confirm the specifics with a tax professional for your situation.
Possibly, up to a limited amount, depending on your adjusted gross income — the IRS's passive activity loss rules can restrict how much rental loss you can deduct against other income. A CPA can calculate how this applies to your specific tax situation.