Prop 33: A Threat to the Future of Accessory Dwelling Units in California

California is in the midst of an acute housing crisis, with millions of residents struggling to find affordable housing options. In an effort to alleviate some of the pressure, Accessory Dwelling Units (ADUs) have emerged as a popular and effective solution. These smaller, secondary living spaces—often referred to as “granny flats,” “backyard cottages,” or “in-law suites”—are typically built on single-family lots and offer an affordable alternative to traditional housing construction.

ADUs provide a way for homeowners to increase housing stock without having to undergo large-scale development projects. They also offer flexible living arrangements, allowing for rental income, multigenerational living, and more affordable housing options. However, the passage of Proposition 33 could potentially derail the progress made with ADUs in California, creating financial disincentives for homeowners and developers alike.

In this article, we will explore how Prop 33—a measure that aims to reform property tax laws in California—could have a negative effect on building ADUs. While Prop 33 is primarily focused on changes to property tax assessments when a property is transferred or inherited, its potential impact on ADUs is substantial. We will delve into the key components of Proposition 33, explain how it interacts with ADU development, and examine why this measure could pose a serious threat to the expansion of affordable housing in California.

What Is Prop 33?

Propo 33 is a proposed measure that would change how property taxes are assessed on inherited properties in California. The state’s current property tax system is governed by Proposition 13, passed in 1978, which limits property tax increases to a maximum of 2% per year based on the original purchase price. This means that long-time homeowners benefit from relatively low property taxes, even as the market value of their homes skyrockets. Proposition 33 aims to revise this system by reassessing property taxes at current market value when a property is inherited, unless the inheritor continues to live in the home as their primary residence.

Currently, when a property is passed down to an heir, the property tax assessment does not change, even if the new owner decides to rent out the property or use it as an investment. Prop 33 would alter this by imposing a reassessment to market value if the inheritor does not make the property their primary residence. This is intended to close a loophole that allows wealthy families to maintain low property taxes on inherited investment properties, even when the homes are no longer used as residences.

While the proposition may seem like a reasonable attempt to ensure fairness in the property tax system, its consequences for ADU development are less favorable. The effects of Prop 33 extend beyond its direct scope and could create significant financial barriers for those interested in building or maintaining ADUs.

The Vital Role of ADUs in California’s Housing Crisis

Before delving into the specifics of how Prop 33 could negatively affect ADUs, it’s important to understand why ADUs have become such a crucial part of California’s housing landscape.

1. Affordable Housing Solutions

ADUs are an attractive solution to California’s housing shortage because they provide a relatively low-cost way to add new housing stock in established neighborhoods. Unlike large-scale housing developments, which can take years to plan, finance, and build, ADUs can be added to existing properties relatively quickly and with fewer regulatory hurdles. They offer an affordable living option for tenants, and for homeowners, they can provide rental income to offset rising housing costs.

2. Flexible Living Arrangements

In addition to being a source of rental income, ADUs are also a popular choice for families looking for multigenerational living options. With the high cost of housing, many younger adults are finding it difficult to afford their own homes, while elderly parents may need to downsize or live closer to family for care. ADUs allow families to stay together while maintaining separate living spaces, making them an ideal solution for a range of housing needs.

3. Environmental Benefits

Building ADUs also has environmental advantages. By utilizing existing land more efficiently, ADUs reduce urban sprawl and the environmental impact associated with building new housing developments on previously undeveloped land. ADUs also tend to be smaller and more energy-efficient than traditional single-family homes, further reducing their carbon footprint.

Given these benefits, ADUs have been championed as a key part of the solution to California’s housing crisis. However, Prop 33 threatens to undermine the progress that has been made in this area.

How Prop 33 Could Undermine ADU Development

While Proposition 33 is not specifically targeted at ADUs, its changes to property tax laws could have significant and unintended consequences for homeowners who build or inherit properties with ADUs. The following are several ways in which Prop 33 could have a negative effect on ADU development in California:

1. Increased Property Tax Burdens

One of the most significant impacts of Prop 33 is the potential for higher property taxes on inherited homes with ADUs. Under Prop 13, homeowners enjoy stable, predictable property taxes, as annual increases are capped at 2%. This stability allows many Californians—particularly older homeowners or those on fixed incomes—to afford to stay in their homes despite rising market values.

However, if Proposition 33 passes, the children or heirs who inherit a property with an ADU could see a substantial increase in property taxes if they do not live on the property themselves. For example, if a homeowner builds an ADU with the intention of leaving the property to their children, but the children choose to rent out both the main house and the ADU, the property taxes could be reassessed at current market value. This could result in a massive increase in taxes, making it financially infeasible for the heirs to keep the property.

This reassessment could create a chilling effect on ADU construction, as homeowners may be less likely to invest in building an ADU if they know their heirs will face significantly higher property taxes. Many homeowners rely on the rental income from an ADU to help cover expenses, but if Prop 33 passes, the increase in property taxes upon inheritance could wipe out any financial benefits of maintaining an ADU.

2. Discouraging Long-Term Investment in ADUs

Building an ADU is a long-term investment, both financially and logistically. Homeowners must navigate a complex web of zoning laws, building permits, and construction costs in order to add an ADU to their property. For many, the decision to build an ADU is driven by a desire to create additional income streams, provide housing for family members, or increase the overall value of their property.

However, if Prop 33 passes, the uncertainty surrounding future property tax assessments could discourage homeowners from making this investment. The fear of a tax reassessment upon inheritance may lead some property owners to forgo building an ADU altogether, as they would not want to burden their heirs with the financial consequences.

In addition, Prop 33 could make it harder for existing ADU owners to plan for the future. Homeowners who have already invested in ADUs may find that the value of their investment is diminished if their heirs are unable to afford the increased property taxes after inheriting the property. This could lead to a slowdown in the growth of ADUs, as fewer homeowners will see the long-term benefits of building these units.

3. Reduced Rental Housing Supply

Many homeowners build ADUs with the goal of generating rental income, either to supplement their own finances or to provide affordable housing options for tenants. ADUs play a crucial role in increasing California’s rental housing supply, particularly in high-demand areas where traditional rental units are scarce.

However, Prop 33 could reduce the number of rental properties available in California, as it would discourage homeowners from using inherited properties as rental units. Under the new rules, if a homeowner inherits a property with an ADU and decides to rent out either the main house or the ADU, the property would be reassessed at market value, resulting in significantly higher property taxes.

The increased tax burden could make it financially unfeasible for the new owner to keep the property as a rental. This would not only decrease the availability of rental housing but also reduce the incentive for homeowners to build ADUs in the first place. In a state that is already grappling with a severe housing shortage, any measure that limits the growth of rental housing is a step in the wrong direction.

4. Disincentives for Multigenerational Living

One of the key benefits of ADUs is their ability to facilitate multigenerational living arrangements. Many families in California are using ADUs to house elderly parents, adult children, or other family members who need affordable living spaces. This type of living arrangement can help alleviate the financial strain of high housing costs and provide support for family members who may not be able to afford their own homes.

However, Prop 33 could create disincentives for multigenerational living by increasing the financial burden on families who inherit properties with ADUs. If heirs are forced to live in the main house to avoid a property tax reassessment, they may not be able to use the ADU as intended—for example, to house a family member who needs assistance. Alternatively, if the heirs choose to rent out the ADU to generate income, they would face a significant tax hike, which could offset the benefits of having the ADU in the first place.

By making it more difficult for families to maintain multigenerational living arrangements, Prop 33 could reduce the flexibility and affordability of housing options for California residents.

Prop 33 and the Broader Housing Crisis

The negative effects of Prop 33 on ADU development must also be considered within the broader context of California’s housing crisis. The state is already facing a severe shortage of affordable housing, with millions of residents struggling to find suitable living arrangements. In this environment, any measure that discourages the development of new housing units