Building an ADU for your family: what to check first

Many families want to keep the grandparents close, give an adult child a place of their own or take in a relative who just arrived. An accessory dwelling unit, or ADU, can be the answer: a complete place to live on the same lot as your home. But building one is a big project, with permits, money and tax rules. This guide explains what to check before you start, with examples from official sources. If you do not own a home yet and want to buy one that already has an ADU, read Buying a duplex or home with an ADU.

ADU per lot, at most, for Fannie Mae

1¹

In California, the time to approve or deny a complete ADU application

60 days⁴

In improvements, the minimum for FHA's Standard 203(k), which can include an ADU

$5,000³

What an ADU is (and is not)

An accessory dwelling unitaccessory dwelling unit (ADU)An accessory dwelling unit (ADU) is a living space, separate from the main house, on the same lot. It can be attached to the house, inside it or detached. According to Fannie Mae, it must have its own entrance, kitchen, sleeping area and bathroom, and be smaller than the main house. If it can only be reached through the main house, or it is open to it with no privacy, it does not count as an ADU. A second kitchen alone does not make one either. Fannie Mae allows only one per lot, and not with a two- to four-unit home.See the full definitionClose is a place to live that is independent of the primary home. For Fannie Mae, it must provide for living, sleeping, cooking and bathing, and be on the same lot. It must be smaller than the primary home and have its own entrance, kitchen, sleeping area and bathroom. It is not an ADU if it can only be reached through the primary home, or is open to it with no privacy.¹

The kitchen matters. It must have at least cabinets, a countertop, a sink with running water and a stove or stove hookup. A hotplate, microwave or toaster oven does not count as a stove. And a second kitchen by itself does not turn a room into an ADU.¹ Fannie Mae allows only one ADU per lot, and not on a two- to four-unit property.¹

It can be over the garage, in the basement or in a small addition, and it can be site-built or factory-built, including a HUD Code manufactured home that is real property.¹ For FHA, a one-unit home with a single ADU remains a one-unit property.³

ADU, room with a bathroom or second kitchen

Fannie Mae and FHA

ADU

• Its own entrance, kitchen, sleeping area and bathroom
• Smaller than the primary home
• One per lot

Part of your home

Room with a bathroom

• Reached through the primary home
• No kitchen of its own
• Not an ADU

Part of your home

Second kitchen

• An extra kitchen inside the home
• By itself it is not an ADU
• A microwave or hotplate does not count as a stove

If you want the unit to count as an ADU for a loan, design it with its own entrance, full kitchen and bathroom.

First: zoning and permits

Before you spend on plans, ask your city’s or county’s planning or building office whether your lot’s zoningzoningZoning is the set of local rules about what each piece of land can be used for and what can be built on it. In Arizona, for example, state law lets each city or town regulate whether buildings and land are used for housing, business, industry or agriculture, along with their height, size and setback lines. In an appraisal, the appraiser reports the home's zoning class (such as R-1 or R-2) and whether its use is legal, legal because it predates the current rules (grandfathered), illegal, or in an area with no local zoning. Some construction projects need a zoning permit from the local government.See the full definitionClose allows an ADU, how big it can be and which building permitsbuilding permitA building permit is the approval a local government gives to start a construction project. Not every area of the country requires one. If you renovate with an FHA 203(k) loan, the program requires all building permits to be obtained before work starts and posted on site. Freddie Mac also recommends working with your contractor to get any permits you need before a renovation begins.See the full definitionClose you need. Get the rules in writing. If your home is in a homeowners association, check its rules too; the guide HOA and CDD explained explains how.

The rules vary a lot from place to place. California is an example of a state with its own ADU law. According to the California housing department’s ADU Handbook, ADUs there are approved without discretionary review or a hearing, under objective standards. The permitting agency must approve or deny your complete application within 60 days, if there is already a home on the lot. If it denies it, it must give you in writing the list of what is missing and how to fix it within those 60 days.⁴

In California, the local government also cannot require the owner to live on the property to have an ADU, except in one case of separate sale. There is also the JADU, a unit of no more than 500 square feet inside the home; if it shares a bathroom with the home, the owner must live there. And local governments may require ADUs to be rented for terms longer than 30 days.⁴

Why an unpermitted ADU is costly

Building without a permit may seem faster and cheaper, but it can cost you later. Fannie Mae considers an ADU legal if current zoning allows it. If zoning does not allow an ADU under any circumstance, the property is only eligible for one of its loans if the lender confirms the unit will not jeopardize a future property insurance claim.¹ For FHA, the ADU must comply with zoning, which may include a legal nonconforming use.³

In plain terms: an unpermitted unit can complicate your next refinance, the sale of the home and an insurance claim. Tell your insurer before you build and ask whether it covers the new unit; the guide Home insurance explained helps you review your policy. Building can also change your property taxproperty taxProperty tax is the tax the county, city, school district and other local bodies charge real property owners every year to pay for schools, police, fire and other public services. It is computed on the value the assessor's office assigns to your home, at each body's rate, minus the exemptions you qualify for, such as the primary-residence exemption in many states. If you have a mortgage you normally pay it month by month inside your payment, through the escrow account. It is generally deductible on your federal return if you itemize.See the full definitionClose: ask your county assessor’s office and read Property tax explained.

How to pay for the ADU

There are several ways to finance the work, each with different costs:

• A Fannie Mae renovation loan (HomeStyle). It can be used to build outdoor structures, for example accessory units, when local zoning allows and they meet building codes. It cannot be used to tear down and rebuild the whole home, and not every lender offers it: they need special approval.²
• An FHA 203(k) loan. Under the section of HUD’s Handbook that takes effect November 10, 2026, the Standard 203(k) requires at least $5,000 in improvements, and can include converting a home into a home with an ADU, adding an ADU attached to the home or renovating an existing ADU.³
• Your home’s equity. A home equity line of credit (HELOC) or a cash-out refinance. The guide HELOC vs. cash-out refinance compares the two, and the refinance tool helps you see the numbers.

A renovation loanrenovation mortgageA renovation mortgage is a home loan that combines, in one loan with one closing, the money to buy or refinance a home and the cost of renovating it. Freddie Mac, for example, buys conventional CHOICERenovation loans, which can pay for a new roof, a kitchen or bath remodel or an addition, and CHOICEReno eXPress loans for smaller projects. FHA has its own version, the 203(k) loan. According to HUD, this avoids typical construction lending with two loans; a construction loan is usually short-term.See the full definitionClose uses your home as collateral. If you cannot pay it, you can lose your home. Before signing, compare offers and talk with a HUD-approved housing counselor, often for free.⁶

From the idea to the finished ADU

1. 1. Ask your city's rules

   Before anything

   Zoning, size, permits and whether you must live there.⁴

2. 2. Design a complete ADU

   With the plans

   Its own entrance, kitchen with a stove, sleeping area and bathroom.¹

3. 3. Choose how to pay for it

   Before hiring anyone

   HomeStyle, 203(k), HELOC or savings; compare costs.²

   Try it with your numbersShould I refinance?

4. 4. Apply for the permit

   With a complete application

   In California, the answer must come within 60 days.⁴

5. 5. Tell your insurer

   Before building

   A unit that zoning does not allow can affect a claim.¹

6. 6. Hire with a written contract

   When work starts

   Licensed, with a written bid and payments as work progresses.

Choose the contractor carefully. Ask for a license, a written contract and payments as the work progresses, never everything up front. The guide Contractor and home repair scams explains the warning signs.

If your relative pays you rent: taxes

For the IRS, in most cases everything you receive as rent goes in your gross income.⁵ But when the person living in the unit is family, there is a special rule. A day counts as personal use if a member of your family uses it, unless it is their main home and they pay a fair rental price. It also counts as personal use if anyone pays less than a fair rental price. For this rule, family is your spouse, your siblings and half siblings, your parents and grandparents, and your children and grandchildren. A fair rental price is generally what someone not related to you would pay.⁵

Why does it matter? Because personal-use days change which expenses for the unit you can deduct. If your parents live in the ADU rent-free, there is no rent to report, but those days count as personal use. If you charge your son rent, report it. A VITA site can help you with your case, and the guide Renting out a room or unit explains the lease, insurance and fair housing if you ever rent to someone outside the family.

Example with real numbers

Two families, two ADUs

An example in words, not a real case, of how the rules change.

Family 1, the grandparents live rent-free

No rent; for the IRS, those days are personal use

Family 2, the son pays a fair rent

The rent goes in income; it is his main home

Both built with a permit

The ADU counts for the appraisal and insurance

Both have their own entrance, kitchen and bathroom

For Fannie Mae, it is an ADU

What they have in common

They asked about the rules, got a permit and told their insurer

The rules come from the IRS and Fannie Mae.⁵¹¹ Use the family budget to see how much you can pay each month for the work.

Run it with your numbersFamily budget

If this is your situation

You will build for your parents

If they live rent-free, there is no rent to report, but the IRS counts it as personal use.⁵

You want to convert the garage

A space over or in the garage can be an ADU if it has its own entrance, kitchen and bathroom.¹¹

You already have an unpermitted unit

It can affect your insurance and your next loan; ask whether you can legalize it.¹

You have no savings for the work

HomeStyle and the 203(k) can include an ADU; compare and talk with a counselor.²³

You live in California

State law sets 60 days to answer your complete application.⁴

Costly mistakes

• Mistake: Building without asking about zoning.

  Instead: Ask first; an ADU that zoning does not allow complicates loans and insurance.¹

• Mistake: Putting only a microwave in the kitchen.

  Instead: To count as an ADU it needs a stove or stove hookup.¹

• Mistake: Making the only entrance through the primary home.

  Instead: An ADU needs its own entrance.¹

• Mistake: Not telling your insurer.

  Instead: Confirm before building that your policy covers the new unit.¹

• Mistake: Charging your relative rent without reporting it.

  Instead: What you receive as rent goes in your gross income.⁵

What to do this week

1. Call your city’s or county’s planning office and ask for the ADU rules in writing.⁴
2. Check with a simple sketch whether your idea has its own entrance, kitchen, sleeping area and bathroom.¹
3. Ask your insurer how it would cover the new unit.¹
4. Ask two lenders about HomeStyle or the 203(k).²³
5. Decide whether your relative will pay rent and review the IRS rule.⁵
6. Build your family budget with the work payment included and read Budgeting for home maintenance and repairs.