If you live in California, you may have heard about the condo-ization of accessory dwelling units (ADUs). Here’s a quick overview of what condo-ization means for ADUs and for California homeowners.

California Assembly Bill 1033 (AB-1033) is a new state law that allows homeowners to sell ADUs built on their properties. Before the law took effect on January 1, 2024, ADUs were exclusively allowed as rentals because California state law prevented them from being sold as separate housing units. Under existing law, the separate sale or conveyance of ADUs from the primary residence was prohibited. AB-1033 went into effect on January 1, 2024, allowing local agencies to adopt ordinances for the separate sale of ADUs. Existing law requires local governments to regulate, approve, and oversee the creation and conveyance of accessory dwelling units in accordance with statutory obligations.

The purpose of AB-1033 is to increase housing density and provide Californians with more attainable homeownership options. Legislative findings included in the bill clarify the intent to expand affordable housing opportunities and address the state’s housing shortage. ADUs are a flexible way to increase housing density. Unlike larger multifamily buildings, they fit well into many existing lots and match the character of their surrounding neighborhoods. Because ADUs are smaller than single-family homes and often make use of existing infrastructure on a property, they are typically less costly to develop and therefore a more affordable housing option. Statutory provisions establish procedures for local agencies to implement AB-1033, including the adoption of ordinances and mechanisms for the sale and conveyance of ADUs. The government code proposed by AB-1033 introduces changes that require local agencies to update their regulations to permit the separate sale of ADUs. Under specified law, AB-1033 modifies the Planning and Zoning Law to allow for the separate sale or conveyance of ADUs and primary residences. This legislative change is expected to have a significant impact on California's real estate market by creating new opportunities for homeowners and buyers.

When we think of a condo, we usually think of a type of building, but in reality, it is a form of property co-ownership. ADU condo-ization involves allocating ownership of separate units on a single property–say a house and an ADU–to distinct owners. This is typically accomplished through a condominium structure, which allows for the legal separation and individual ownership of each unit, including the ADU. On a property with a condo-ized ADU, one party owns the primary home, and another owns the ADU. The process of separating an ADU from its primary residence introduces complexities such as the need for lender consent and adherence to local regulations. Lender consent is required for the subdivision and sale of an ADU if there is a mortgage on the property.

This ownership structure allows separate parties to legally own discrete parts of the same property without going through a lengthy, often expensive subdivision process. With the passage of AB-1033, under these terms the ADU is considered separate from the main home and can be sold separately. This legislation enables homeowners to sell ADUs separately from the primary residence, expanding market opportunities and property value. Under certain local ordinances, ADUs can be conveyed separate from the main home, allowing for independent ownership and transfer. When an ADU is sold, it is conveyed separately from the primary residence through legal mechanisms such as condominium mapping or tenancy in common arrangements. The primary home and ADU have two different property taxes, which are billed separately. Lender consent is necessary before recording a subdivision map to create a condominium from an accessory dwelling unit. The conversion of ADUs into separate condominiums adds to California’s housing inventory, assisting in the alleviation of housing market pressures.

To facilitate these transactions, a common agreement—such as a tenancy in common or condominium arrangement—must be established between the parties involved. This often requires a recorded tenancy in common agreement or condominium declaration to ensure legal compliance and proper documentation of ownership. When going through the subdivision process, compliance with the Subdivision Map Act is essential, as it governs the legal separation of units and ensures adherence to state and local standards.

Though AB-1033 legalized the separate sale of ADUs statewide, each city or county can accept or reject the ADUs-as-condominiums approach for its residents. That means your local jurisdiction must opt into AB-1033 and adopt a local ordinance to allow the separate conveyance of the primary house and ADU as condominiums. The local agency is responsible for establishing standards, approving permits, and adopting ordinances that enable this process. Cities such as San Diego and Oakland are actively adopting ordinances to support the implementation of AB-1033, and some of these provisions are part of a state mandated local program.

The following Bay Area municipalities have already approved the ordinance:

• San Jose: adopted mid-2024
• Oakland: adopted mid-2024
• Berkeley: approved May 2024, plans to finalize the ordinance by mid-2025

Condo-ized ADUs must follow the same rules as other new condominiums—owners must provide written notice to local utilities of the creation and conveyance of separate units, and a homeowners association must be established to manage the maintenance of the property’s exterior and shared spaces (like driveways or common roofs). If an ADU is tenant-occupied, the owner must notify tenants well ahead of any conversion and sale process. Independent utility connections are required for ADUs to qualify for separate sale. Ministerial approval is used to streamline the ADU permit process, ensuring that permits are granted automatically if all requirements are met, without discretionary review. ADUs sold as separate condominiums can be financed through federally guaranteed mortgages, enhancing accessibility for buyers. Only a qualified buyer may purchase a separately sold ADU, and in some cases, a qualified nonprofit corporation may develop and sell ADUs under certain conditions. Local ordinances may require owner occupancy for a specified period, depending on the regulatory framework. All condo-ized ADUs must meet specified requirements set forth by law or ordinance for legal conveyance.

On a property with a condo-ized ADU, one party owns the primary home, and another owns the ADU.

On a property with a condo-ized ADU, one party owns the primary home, and another owns the ADU.

When considering the separate sale of an accessory dwelling unit (ADU) from your primary residence, understanding the property tax implications is essential. Under California state law and the California Constitution, property taxes are typically reassessed when a property is sold or transferred. However, with the passage of California Assembly Bill 1033, when an ADU is sold separately, only the ADU is subject to reassessment for property taxes, while the primary residence retains its original tax base. This distinction can offer a significant advantage to homeowners, as it allows them to sell an ADU without triggering a full reassessment of their main property.

Local governments and local agencies play a pivotal role in shaping the property tax landscape for separate ADU sales. According to the Planning and Zoning Law, local ordinances must be adopted to permit the separate sale of ADUs, and these ordinances may include specific statutory provisions regarding property tax reassessment. Each local jurisdiction may have its own requirements and processes, so it’s important for property owners to consult with their local government or a knowledgeable real estate professional to understand how local building codes, zoning designation, and government code requirements will affect their situation.

The process of selling an ADU separately involves the creation of a condominium plan, which is a key part of the condo mapping process. This plan must be approved by the local jurisdiction and outlines the division of the property into separate interests—one for the primary dwelling unit and one for the ADU. Each unit will have its own ownership structure and property tax bill, and both must comply with local building codes and zoning law. The approval process also requires adherence to specified standards, including independent utility connections and compliance with the California Building Code.

Allowing ADUs to be sold separately can have a positive impact on housing supply and affordability in California’s real estate market. By increasing housing density and providing more affordable housing options, separate ADU sales can help address the state’s ongoing housing crisis. At the same time, homeowners benefit from increased flexibility and potential new revenue streams, while buyers gain access to entry-level homes in areas zoned for residential use.

However, the impact on property value and property taxes will depend on a variety of factors, including local ordinances, housing density, and demand for separate housing units. Homeowners should be aware that the ownership structure of a condo-ized ADU may also affect homeowners association fees, property taxes, and the overall value of their property.

On the heels of SB-9, AB-1033 offers newfound flexibility and financial opportunities for California homeowners. The law gives homeowners more options for leveraging existing equity, increasing housing supply, and boosting homeownership with more attainable options for buyers.

Homeowners who want to avoid being landlords can, for example, build an ADU and sell it to help finance its construction and earn extra income, all while giving someone else the chance to buy a reasonably-priced home.

ADUs play a pivotal role in addressing housing needs across the county, and ADU condo-iziation has a a proven track record. Cities like Austin, TX, Seattle, WA, Portland, and Princeton, NJ have benefited from condo-ized ADUs for years as a cheaper housing option in expensive markets. San Francisco is currently evaluating how AB-1033 will impact property sales, affordable housing, and the implementation of local regulations.

School districts and other public agencies are also involved in the process, as local ordinances and property conveyance may affect funding and compliance requirements. When local agencies implement AB-1033, they may face costs mandated by the state, which can include certain costs related to new ordinances or regulations. The state is required to reimburse local agencies for these costs when they are mandated by legislation.

As ADUs continue to play a pivotal role in addressing the state’s housing needs, the innovative possibilities legalized under AB-1033 reflect the dynamic and evolving nature of California’s real estate market. A related statement in the legislative documentation clarifies the intent and scope of these provisions.

AB-1033 and SB-9 allow homeowners to subdivide their lots and build (and sell) extra units, or even a portion of their land. Both laws aim to lessen California’s grinding housing crisis by adding extra homes that are more compact and affordably priced. Together, they create a market for approximately $750 billion of backyard land value that restrictive zoning has locked up for decades.

It is important to note that AB-1033 and SB-9 differ in some key details:

• Housing types. SB-9 deals with duplexes and lot splits, not ADUs. While SB-9 allows homeowners to split a portion of their land as-is or build another unit on their property, AB-1033 specifically addresses condo-ized ADUs. Rather than selling a portion of a lot, AB-1099 allows homeowners to sell their ADUs as condos.
• Eligibility. While SB-9 is a statewide requirement–meaning your city must allow you to pursue eligible developments as long as your property meets the qualifications–AB-1033 only gives cities the option to permit condo-ized ADUs. It is up to local jurisdictions whether or not they will allow it.
• Zoning. SB-9 is restricted to lots zoned for single-family, while AB-1033 offers municipalities the flexibility to consider other lot types.
• Condominium Plan. Selling an accessory dwelling unit requires the preparation and approval of a formal condominium plan.
• Housing types. SB-9 deals with duplexes and lot splits, not ADUs. While SB-9 allows homeowners to split a portion of their land as-is or build another unit on their property, AB-1033 specifically addresses condo-ized ADUs. Rather than selling a portion of a lot, AB-1099 allows homeowners to sell their ADUs as condos.
• Eligibility. While SB-9 is a statewide requirement–meaning your city must allow you to pursue eligible developments as long as your property meets the qualifications–AB-1033 only gives cities the option to permit condo-ized ADUs. It is up to local jurisdictions whether or not they will allow it.
• Zoning. SB-9 is restricted to lots zoned for single-family, while AB-1033 offers municipalities the flexibility to consider other lot types.

When deciding which option is best for you, consider:

• The size of your lot. ADUs have a size restriction of 1,200 square feet in terms of maximum square footage, and only three are allowed per lot, while SB-9 provides more flexibility with the sizes and number of homes that are classified as single-family homes or duplexes.
• Extra costs and complexities. Lot splits under SB-9 can be an expensive and lengthy process which may add costs and time to your home redevelopment. Legal expenses and the administrative lift to establish and maintain a homeowners association for a condo-ized ADU under AB-1033 may also add cost and burden.
• Safety Inspections. A safety inspection of the accessory dwelling unit must be conducted before the recordation of a condominium plan.
• The goals of your home redevelopment. While selling a portion of your lot with a house or duplex may bring you a higher return on investment, a condo-ized ADU may better serve your friends and neighbors, like young families seeking entry-level homes or older adults that are looking to downsize.
• The size of your lot. ADUs have a size restriction of 1,200 square feet in terms of maximum square footage, and only three are allowed per lot, while SB-9 provides more flexibility with the sizes and number of homes that are classified as single-family homes or duplexes.
• Extra costs and complexities. Lot splits under SB-9 can be an expensive and lengthy process which may add costs and time to your home redevelopment. Legal expenses and the administrative lift to establish and maintain a homeowners association for a condo-ized ADU under AB-1033 may also add cost and burden.
• The goals of your home redevelopment. While selling a portion of your lot with a house or duplex may bring you a higher return on investment, a condo-ized ADU may better serve your friends and neighbors, like young families seeking entry-level homes or older adults that are looking to downsize.

The choice between the two depends on your specific circumstances and objectives. Both offer paths toward maximizing the value of your property while providing needed housing in your neighborhood.

Contact Type Five to explore your options, discuss your home redevelopment goals, and get started on your home project!