Carport to ADU

[Timothy Eyrich]

Hi I'm new to this and hoping someone can help me understand this scenario. I have a carport underneath my beach house. I'm enclosing it to create an ADU - 1 bed, 1 bath, living room and kitchen. It will have its own entrance and will be used as an Airbnb for stays 7 days or less. It's going to be completely new construction and new furniture etc inside. I'll manage it myself and do all the cleaning, renting etc. Would this qualify as a property for bonus depreciation? Thanks!

[Dylan Brown]

 @Timothy Eyrich This is one of those situations where the answer is both yes and no.

If you converted part of an existing building into a rental ADU (Accessory Dwelling Unit), then that portion of the building is now considered business property. That means it's eligible for depreciation, which is a way of writing off part of the cost over time. You can even get a cost segregation study done, which breaks down the different parts of the building to see if some can be written off faster (like over 5 or 15 years instead of the full building's life). Some of those items might even qualify for bonus depreciation, which lets you write off a big portion upfront.

That said, there’s a timing rule to be aware of. The new 100% bonus depreciation rules from the OBBB bill that just passed only apply to property acquired after January 19, 2025. So if you converted your space to a rental in July 2025 but actually acquired it prior to 01/19/2025, for example, you wouldn’t qualify for the full 100% bonus that just rolled out. Still, depending on when you bought the property, you might qualify for partial bonus or at least benefit from shorter depreciation timelines.

Now here’s the good news: any money you spend on the actual conversion (like renovations or construction costs) is treated as a brand new business expense. If those costs were paid after January 19, 2025, they likely would qualify for the full bonus depreciation, making them a big potential tax win.

Since this depends a lot on your specific situation (when you bought the property, when the rental started, how much you spent, etc.), I recommend talking to a reputable cost segregation firm. They can help figure out what qualifies and when it was placed into service. Then work with your CPA to map out the potential depreciation write-offs and see how those losses could be used to lower your taxes on other income.