Deductibility of ADUs on Wheels vs. Modular on Foundations
- Records In Order
- 1 day ago
- 10 min read
ChatGPT said:
Under both federal and California tax law, a portable ADU (Accessory Dwelling Unit)—such as a modular home—placed on your primary residence’s property and used as a rental unit can be deductible, but the deductibility depends on how the expenses are categorized and the percentage of use. Here’s a breakdown:
1. Federal Tax Treatment (IRS)
If the ADU is placed on your property and used as a rental, it is treated like a rental property. That means:
✅ Deductible Expenses Include:
Depreciation of the ADU structure
Interest on a loan used to acquire/build the ADU (not your primary residence mortgage)
Property taxes (apportioned between personal and rental use if on same parcel)
Repairs and maintenance related to the ADU
Insurance (pro-rated if shared)
Utilities, if you pay them and don’t charge the tenant
Management fees, advertising, and other direct rental expenses
📝 Depreciation Example: For residential rental property, depreciation is typically taken over 27.5 years using the straight-line method.
🚫 Not Deductible:
Cost of land (you can't depreciate land)
Improvements not related to the rental unit
Personal-use portion of shared utilities or services (unless apportioned)
2. California Tax Treatment (FTB)
California largely conforms to federal tax rules for rental real estate income and deductions. Therefore:
Rental income is taxable at your California income tax rate.
Same deductions as federal are generally allowed (depreciation, property taxes, interest, etc.).
California does not allow depreciation differences for most types of property.
3. Basis and Depreciation of the ADU
If the modular ADU is:
Purchased: Your basis is the purchase price plus installation costs.
Built: Your basis is the cost of materials, labor, permits, etc.
This basis becomes the amount depreciated over 27.5 years (residential rental).
4. Passive Activity Rules
Rental real estate is generally considered a passive activity unless you qualify as a real estate professional. This means:
Rental losses may be limited to $25,000 annually if your income is below $100,000 (phases out at $150,000).
Losses in excess may be carried forward to future years.
5. Partial Use or Mixed Use Considerations
If the ADU is:
Used part of the year for rental, and part for personal/family use: you must prorate expenses.
Shared in some way (e.g., utilities): use a reasonable allocation method (sq. footage, number of rooms, etc.).
6. Capital Gains Considerations (on Sale of Home)
If you sell your primary residence:
The rental ADU portion may not qualify for the $250K/$500K primary residence exclusion.
You may owe capital gains and recapture of depreciation on the ADU portion.
Summary Checklist
Deduction/Tax Item | Deductible? | Notes |
ADU structure depreciation | ✅ Yes | 27.5 yrs |
Property taxes | ✅ Yes (apportioned) | Shared if on same parcel |
Interest on ADU loan | ✅ Yes | Must be separate from primary home |
Land cost | ❌ No | Land not depreciable |
Utilities | ✅ Partial | Only if paid by landlord |
Repairs/maintenance | ✅ Yes | Rental-related only |
Would you like help estimating the depreciation deduction or rental income tax impact based on a specific cost or scenario?
You said:
yes. Would the ADU in the form of a modular home qualify for bonus depreciation or the Section 179 expense election in the year placed in service?
ChatGPT said:
Great question — especially important for tax planning.
✅ Short Answer:
A modular home ADU used for rental purposes generally does not qualify for Section 179 expensing, but bonus depreciation may be available under certain conditions, depending on how the ADU is classified.
1. Section 179 Expensing
Section 179 allows businesses to deduct the full purchase price of qualifying equipment or software in the year it's placed in service.
❌ Modular ADU typically does not qualify for Section 179
Section 179 excludes residential rental property.
The ADU is considered residential real property, which is not eligible.
Even though a modular home may be "movable," once it's placed on land and used for residential rental, it becomes real property for tax purposes.
📝 Even small businesses cannot expense residential rental buildings under §179.
2. Bonus Depreciation
Bonus depreciation (IRC §168(k)) allows a business to immediately deduct a large percentage (up to 100% for property placed in service before 2023; now phased down) of the cost of qualifying property.
⚠️ Modular ADU likely does not qualify for bonus depreciation, unless:
The ADU is classified as "personal property" (i.e., not permanently affixed to the land).
The ADU has a class life of 20 years or less (residential rental buildings have a 27.5-year life and don’t qualify).
It is not real property (bonus depreciation applies to personal property only).
📌 If your modular ADU:
Is on wheels or not permanently affixed, and
Is depreciable as personal property with a shorter useful life (e.g., like an RV or trailer),
...then bonus depreciation may apply.
🧠 Caution: Most modular homes installed on a foundation, connected to utilities, and used for long-term residential rental are treated as real property → bonus depreciation and §179 do not apply.
3. Depreciation Likely Available:
Assuming it’s considered residential real estate, you must depreciate the ADU over 27.5 years using straight-line depreciation under MACRS.
4. California Difference
California does not conform to bonus depreciation.
California also does not conform to Section 179 to the same extent (limits are lower, especially for vehicles and equipment).
So, even if bonus depreciation were allowed federally, you’d still need to depreciate the ADU over 27.5 years for CA purposes.
✅ Summary
Tax Provision | Modular ADU (Rental Use) | Notes |
Section 179 | ❌ Not Allowed | Residential rental property excluded |
Bonus Depreciation | ⚠️ Rarely Allowed | Only if classified as personal property w/ ≤20-year life |
MACRS Depreciation | ✅ Yes, 27.5 years | Standard treatment for rental housing |
California Treatment | ❌ No Bonus Depreciation | Straight-line only, no conformity |
Would you like to run a depreciation calculation on an example cost (e.g., $100,000 modular ADU placed in service in 2025)? I can show you the first-year and long-term tax benefits.
You said:
you say: Caution: Most modular homes installed on a foundation, connected to utilities, and used for long-term residential rental are treated as real property → bonus depreciation and §179 do not apply. In what circumstances would bonus depreciation apply?
ChatGPT said:
Excellent follow-up. The circumstances in which bonus depreciation could apply to a modular home ADU are very limited, but they do exist—mainly when the modular unit is treated as personal property, not real property.
✅ When Bonus Depreciation Could Apply to a Modular ADU
1. Not Permanently Affixed – Treated as Personal Property
If the modular unit:
Is not placed on a permanent foundation,
Can be moved or relocated easily (e.g., like an RV or tiny home on wheels),
Is not legally converted to real estate under local law,
...then it might be considered personal property with a class life of 20 years or less.
📌 Example: A tiny home on wheels used exclusively as a rental (like an Airbnb), parked on your lot with minimal permanent attachments, could be depreciated over 5–7 years depending on classification, and bonus depreciation may apply.
2. Used in a Trade or Business (Not Just Rental Activity)
If you’re using the modular unit for business purposes beyond rental, such as:
Office space
Retail (e.g., food kiosk or shop)
Short-term vacation rental that qualifies as a business under IRS rules (i.e., substantial services provided),
...you may qualify for bonus depreciation if the property is not considered a “building.”
🧠 IRS generally treats long-term residential rentals as passive investment property, not a trade or business for bonus depreciation.
3. Used as Equipment or Furnishings
If your modular unit includes equipment or components like:
Appliances
Furniture
HVAC systems (in certain cases)
Removable decks or sheds,
...these components (not the whole ADU) may qualify individually for bonus depreciation if they have a recovery period of ≤20 years.
🚫 When Bonus Depreciation Does Not Apply
If the ADU is permanently installed on a foundation,
Connected to utilities (water, sewer, electrical),
Intended for long-term or indefinite use,
Treated as real property under state/local law,
Depreciated over 27.5 years as residential rental,
Then it’s classified as real property, and bonus depreciation is not allowed.
📘 IRS Reference
Bonus depreciation (IRC §168(k)) is allowed for qualified property with a class life of 20 years or less.
Real property (buildings and permanent structures) does not qualify.
The IRS also considers whether the structure is movable and not inherently permanent when classifying property.
✅ Summary Table
Situation | Bonus Depreciation Allowed? | Reason |
Modular home on permanent foundation (rental) | ❌ No | Real property, 27.5-year life |
Tiny home on wheels, movable, Airbnb | ✅ Possibly | Treated as personal property |
Mobile office trailer (not used as residence) | ✅ Yes | Personal property, 5–7 year life |
Appliances, furnishings in ADU | ✅ Yes | Personal property with ≤20-year life |
Short-term vacation rental with services | ⚠️ Maybe | Depends on services/business classification |
If you’re unsure whether your modular ADU meets these tests, I’d recommend:
Check the title and local real estate classification (real vs. personal property).
Work with a CPA or tax advisor familiar with real estate and depreciation rules.
Would you like to walk through a sample bonus depreciation calculation for, say, a tiny home used as an Airbnb rental?
You said:
when would a modular home ADU be considered to not be permanently installed on a foundation, and/or can the modular home be installed in some other way to not be considered 'permanent'?
ChatGPT said:
Great question. The distinction between permanent and non-permanent installation is crucial in determining whether a modular home ADU is treated as real property (no bonus depreciation) or personal property (bonus depreciation may apply).
✅ When a Modular Home ADU Is Not Considered Permanently Installed
A modular home might not be considered permanently installed—and thus treated as personal property—if it meets all or most of the following criteria:
1. No Permanent Foundation
It's placed on concrete blocks, skids, piers, or gravel pad.
It does not use poured concrete footings or slabs that are permanently anchored to the ground.
It could be moved without destroying the structure or site.
2. Wheels or Chassis Remain Intact
The unit retains its wheels, axles, and trailer hitch.
Even if it's leveled or skirted for appearance, it can be transported without disassembly.
3. No Permanent Utility Connections
Utilities are connected via plug-in or temporary means (like RV hookups or hoses), not hardwired or plumbed underground.
Utility disconnection requires no demolition or significant construction.
4. Not Attached to Land by Deed or Property Record
The ADU is not recorded as part of the real estate (i.e., not titled as part of the parcel).
It remains independently titled, like a vehicle, RV, or manufactured home.
5. Legal Classification
State/local regulations recognize the unit as movable, temporary, or personal property.
It's permitted as a movable tiny home, park model, or temporary structure, not a permanent dwelling.
❌ When It Is Considered Permanently Installed (Real Property)
Set on a permanent concrete foundation or slab.
Utilities are underground and hard-plumbed or wired into the main house or city infrastructure.
Legally converted to real property via state titling or reassessment.
Intended for indefinite, full-time occupancy.
Cannot be moved without significant demolition or site work.
🛠️ Installation Alternatives to Avoid "Permanence"
To keep a modular ADU classified as personal property, you might:
Method | Description |
Trailer-mounted unit | Leave it on a wheeled chassis or mobile base. |
Pier or block setup | Use cinder blocks, piers, or skids instead of slab. |
Portable hookups | Use RV-style water, sewer, and power hookups. |
No building permit conversion | Don’t classify the unit as a building or permanent structure with your city or county. |
Title it as a vehicle or mobile unit | Keep DMV registration or personal property tax status (instead of real property). |
📌 Note: Many California cities (like Los Angeles, San Diego, or San Jose) have zoning codes that allow movable tiny homes as ADUs, and explicitly treat them as non-permanent structures.
⚖️ Real-Life Implication
If you:
Place a tiny/modular ADU on a trailer or skids,
Avoid a concrete foundation,
Use plug-and-play utilities,
And keep the unit separate in legal title from the real estate,
Then the IRS and local property tax authorities may treat the ADU as personal property → and that opens the door to bonus depreciation if used as a rental.
Would you like help evaluating a specific installation plan or city zoning rules to see how your ADU could be structured to remain personal property?
You said:
Yes. Sonoma County in California
ChatGPT said:
In Sonoma County (unincorporated), a modular home ADU (transportable housing unit) can be installed in a way that it’s not permanently fixed, allowing it to be classified as personal property—which may qualify for bonus depreciation. Here's how you'd achieve that under county rules:
🏗️ Sonoma County — NonPermanent Installations
✅ Transportable Housing Units (Tiny Homes on Wheels)
Sonoma County permits transportable housing units (tiny homes on a chassis with wheels) with a temporary occupancy (TEM) permit, typically valid for one year and renewable: https://permitsonoma.org/regulationsandlongrangeplans/regulationsandinitiatives/housingtypes/tinyhouses
These units must be built to ANSI and CBC standards and registered with the DMV: https://permitsonoma.org
They’re treated as personal property, not real property, because they:
Remain on a wheeled chassis
Use temporary hookups for water, power, and sewage
Are not placed on permanent foundations such as slabs or footings
Do not require conversion to permanent structures: https://permitsonoma.org/regulationsandlongrangeplans/regulationsandinitiatives/housingtypes/tinyhouses
⚠️ Temporary Use Permitted Circumstances
These units are approved for specific transitional uses:
While constructing or remodeling a primary residence
Before constructing a permanent ADU
For caretaker or emergency housing
For temporary farmworker housing, wildfire relief, etc. https://www.sonomaindependent.org/grassrootshousingguide/ https://permitsonoma.org/regulationsandlongrangeplans/regulationsandinitiatives/housingtypes/tinyhouses https://permitsonoma.org/Microsites/Permit%20Sonoma/Documents/Policies%20and%20Procedures/8-0%20Planning/8-1-1-Temporary-Occupancy-of-Travel-Trailers-Recreational-Vehicles-and-Transportable-Housing-Units-Tiny-Homes.pdf https://www.businessinsider.com/states-will-compensate-you-for-building-tiny-home-adu-2023-8
Permits are typically good for up to one year and may be extended https://permitsonoma.org/Microsites/Permit%20Sonoma/Documents/Policies%20and%20Procedures/8-0%20Planning/8-1-1-Temporary-Occupancy-of-Travel-Trailers-Recreational-Vehicles-and-Transportable-Housing-Units-Tiny-Homes.pdf
Permanent residential use or ADUs on foundations require standard building/ADU permits and are classified as real property .
✅ Key Requirements to Avoid "Permanent" Classification
Requirement | Must Avoid to Maintain Temporary Status |
Foundation | Avoid slabs/footings—use chassis, skids, piers, or blocks |
Wheels & Chassis | Keep intact; chassis must remain |
Utility Hookups | Use RV-style/temporary hookups—not hard-plumbed or underground |
DMV/Title Status | Register as vehicle or RV, not as real estate |
Permit & Renewability | Use TEM permits; renew yearly instead of building permanent ADU |
📌 Implications for Tax Treatment
If your unit meets these conditions, it's personal property, not a real property structure.
Thus, it may qualify as “qualified property” under §168(k) for bonus depreciation (if used in a trade or business or is a rental).
The unit would be depreciated over a shorter recovery period (e.g., 5–7 years)—allowing accelerated deductions.
In contrast, a modular unit installed with a foundation, hard utilities, and legal ADU permit is real property—depreciated over 27.5 years with no bonus depreciation eligibility.
🧭 What You Can Do
Choose a tiny home on wheels, keeping chassis intact.
Use temporary hookups, and secure a temporary occupancy permit (TEM).
Renew annually as needed for rental use (e.g., AirBnB).
Consult Sonoma County planning to ensure compliance with Zoning Section 2688010(P) and Policy 811 https://permitsonoma.org/regulationsandlongrangeplans/regulationsandinitiatives/housingtypes/tinyhouses https://permitsonoma.org/Microsites/Permit%20Sonoma/Documents/Policies%20and%20Procedures/8-0%20Planning/8-1-1-Temporary-Occupancy-of-Travel-Trailers-Recreational-Vehicles-and-Transportable-Housing-Units-Tiny-Homes.pdf
✅ Bottom Line
By installing your ADU as a wheeled, transportable unit on temporary permit, you preserve its status as personal property—making it eligible for bonus depreciation on your federal tax return. This approach avoids it being classified as real property, which would otherwise require a 27.5-year depreciation schedule without bonus depreciation.
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