ADUs, STRs, and Why They Matter (Especially for Retirement Planning)

(I brought up ADUs in the “Retirement and Investment Content” thread and got several comments – particularly asking that ADU be spelled out. I wrote something there, but figured it deserves it’s own topic.)

Accessory Dwelling Units (ADUs) are not new, but their role in housing and retirement planning has expanded significantly—particularly in high-growth regions. In Seattle, where I live, nearly 70% of new single-family permits now include an ADU. Washington State explicitly promotes ADUs as a response to the senior housing shortage, and they are embedded in every West Coast state’s growth-management framework.

Let’s stat with the terminology:

• ADU: Accessory Dwelling Unit (attached or internal)

• DADU: Detached ADU

• STR / MTR / LTR: Short-, Medium-, and Long-Term Rental

From a retirement planning perspective, ADUs matter for several reasons.

In growing markets, they allow homeowners to extract value from their primary residence without selling, downsizing, or using a reverse mortgage. They also create a way to live near family—particularly adult children in job-rich regions—without moving in together.

They are much less compelling in areas with stagnant or declining populations, where healthcare access and labor availability tend to erode over time. In growth regions, they align well with aging-in-place strategies.

ADUs can be operated as short-, medium-, or long-term rentals, subject to local regulation. Some municipalities restrict or prohibit STRs; where ADUs are legal, long-term rental use is generally permitted and is often the policy goal.

Beyond the housing flexibility, there are real financial and tax considerations that are often overlooked.

The cost to build an ADU is generally depreciable over 27.5 years as residential rental property, which can shelter a meaningful portion of rental income, particularly in the early years. Even when cash flow is modest, after-tax results can be materially better than they appear.

Because ADUs often share utilities and services with the main house, a reasonable portion of expenses—electricity, water/sewer, trash, internet, and landscaping—can typically be allocated to the rental. Yard maintenance is a common example, since the tenant benefits from the same maintained outdoor space. The incremental cost of operating an ADU is often lower than a stand-alone rental, which improves the overall economics.

Because an ADU is typically operated as an active rental, some ongoing household expenses can often be partially allocated to the rental activity. This commonly includes a reasonable share of utilities, internet/cable, and even a portion of a cell phone plan used for tenant communication, booking coordination, and maintenance. The point is not to create new expenses, but to allocate existing ones that are already being incurred in support of the rental. As with other deductions, the allocation needs to be reasonable, documented, and consistent.

ADUs also provide flexibility over time. Early on, the emphasis may be rental income and depreciation. Later, the value may be non-financial—for example, housing a caregiver or a family member while aging in place.

In many high-demand markets, a well-designed ADU can add value to the primary residence that is comparable to, or greater than, its construction cost, although that value is often not fully reflected in assessed value until sale.

In our situation, the ADU will initially provide medium- or long-term rental income (STRs are currently prohibited where we live) and later serve as housing for a caregiver. The goal is not aggressive tax planning, but flexibility: income optionality, cost sharing, and the ability to remain in our home as long as possible.