ADU income and taxes

[Ashley McClure]

Hello,

My husband and I just bought a single family house in Berkeley CA after looking unsuccessful for multifamily for a long time. In order to turn it from full liability into partial asset, we are planning on building a ground up cottage/ADU to rent out (1-2bedrooms, TBD). We are using our own capital for this. My question is, how do others manage the rental income in terms of taxes? We are most likely going to rent it as a long term rental, but Airbnb isn't out of the question... We don't have an LLC, and are unsure about the best way to structure the taxes for this new ADU to minimize taxes. In our bracket having it be taxes as ordinary income would be ruinous. Eager for advice!