ADU rental income.
Taxed correctly.
What Washington homeowners need to file, deduct, depreciate, and keep on record after their ADU goes into service. Federal IRS rules plus Washington-specific B&O, lodging tax, and county property-tax implications — all cited to the actual statute or publication.
Disclaimer: This is reference information, not tax advice. Confirm every number with a CPA who knows Washington real estate before filing.
The ten rules that matter
Long-term rental income (≥ 30 days) is reported on IRS Schedule E (Form 1040). Short-term rentals (< 30 days avg stay) with substantial services move to Schedule C and trigger SE tax.
Source: IRS Pub. 527; IRC §1402(a)(1)
ADU structure depreciates straight-line over 27.5 years. Land is never depreciable. Cost basis = construction cost + permit fees + design + capitalized site work.
Source: IRC §168(c); IRS Pub. 527 Table 2-2d
5-, 7-, and 15-year components (appliances, carpet, landscaping, driveway) can be split out of the 27.5-yr basis. On a $300k ADU, cost seg typically front-loads $30k–$55k of deductions.
Source: IRS Audit Technique Guide — Cost Segregation
Rental losses are passive. Up to $25,000/yr can offset active income if AGI < $100,000 (phases out by $150,000). Excess losses carry forward indefinitely.
Source: IRC §469(i); Form 8582
If you (or spouse) materially participate ≥ 750 hours/yr in real estate, rental losses become non-passive and fully deductible against W-2 income.
Source: IRC §469(c)(7)
Long-term residential rentals (≥ 30 days) are exempt from Washington Business & Occupation tax under RCW 82.04.390. Short-term lodging is taxable.
Source: RCW 82.04.390; WAC 458-20-118
Short-term rentals (< 30 days) collect state sales tax (6.5%) + local sales tax + lodging/convention tax. Seattle adds Short-Term Rental Operator Tax of $14/night.
Source: RCW 67.28; SMC 5.30
King County reassesses the parcel after Certificate of Occupancy. Typical Seattle DADU adds $2,400–$3,800/yr in property tax based on assessed improvement value.
Source: RCW 84.40; King County Assessor
Renting an ADU on your principal residence does NOT disqualify the main house from the $250k/$500k home-sale gain exclusion — but depreciation taken on the ADU is always recaptured at 25%.
Source: IRC §121(d)(6); IRC §1250
A rented ADU separately metered and used 100% for rental can qualify as like-kind property for §1031 exchange, deferring capital gain on sale (post-2017: real property only).
Source: IRC §1031; Rev. Proc. 2008-16
What you can deduct
| Category | Examples | Treatment |
|---|---|---|
| Mortgage interest (allocated) | Interest on construction loan, HELOC used to build ADU | Deduct portion allocated to ADU square footage on Schedule E |
| Property tax (allocated) | King/Pierce/Snohomish County property tax | Allocate by square footage; ADU share to Schedule E |
| Insurance | Landlord policy (DP-3), umbrella, flood | 100% deductible if specific to rental |
| Utilities (if owner pays) | Water/sewer/garbage if not submetered | Allocate by sqft or actual usage records |
| Repairs & maintenance | Paint touch-up, faucet replacement, gutter cleaning | 100% deductible in year incurred |
| Capital improvements | New roof, HVAC replacement, deck addition | Capitalize and depreciate (5–27.5 yrs depending on item) |
| Professional services | Property manager, CPA, attorney, leasing agent | 100% deductible |
| Travel & mileage | Trips to ADU for repairs, showings, inspections | IRS standard mileage rate (67¢/mi in 2026) or actual expense |
| Advertising | Zillow listing fees, tenant screening, photography | 100% deductible |
| Depreciation | 27.5-yr structure + 5/7/15-yr components via cost seg | Non-cash deduction; recaptured at 25% on sale |
Three realistic Puget Sound returns
$2,400/mo × 12 = $28,800
Depreciation $10,180 + interest $7,500 + insurance $1,400 + property tax $3,200 + repairs $1,800 = $24,080
Taxable income: $4,720. At 24% bracket = $1,133 federal tax. WA: no income tax.
$3,200/mo × 12 = $38,400
Cost seg accelerated depreciation $34,000 + other expenses $13,400 = $47,400
Passive loss $9,000 (offsets other passive income or carries forward).
$120/night × 240 nights = $28,800
Cleaning $4,800 + supplies $1,200 + platform fees $4,320 + utilities $2,400 + depreciation $7,300 + interest $5,500 = $25,520
$3,280 net profit. Subject to SE tax (15.3%) + income tax. Collect & remit lodging tax separately.
Examples illustrative only — your AGI, depreciation election, and filing status change every number.
Official references
- Source ↗IRS Publication 527 — Residential Rental PropertyThe authoritative IRS guide for rental income reporting
- Source ↗IRS Publication 946 — How to Depreciate PropertyMACRS schedules, cost basis, 27.5-year residential rules
- Source ↗IRS Form 8582 — Passive Activity Loss LimitationsPassive-loss carryforward calculation
- Source ↗IRS Schedule E (Form 1040)Supplemental income from rental real estate
- Source ↗RCW 82.04.390 — WA B&O rental exemptionLong-term residential rental exemption from B&O tax
- Source ↗WA Dept. of Revenue — Lodging taxShort-term rental tax rates by location
- Source ↗King County Assessor — Property revaluationHow new construction triggers reassessment
- Source ↗IRS Cost Segregation Audit Technique GuideOfficial IRS guidance on cost segregation studies