ADU rental on primary residence — depreciation question

[Budhadipta Dan]

I m debating whether it would make sense to build an ADU on the backyard of our current SFH property in South Bay Area (San Jose). Had a few questions:

- I understand that mortgage interest, prop taxes, insurance, and other expenses should be deducted from gross rental income for tax purposes. But given that this will be a rental unit, should the cost of building the ADU also depreciated (over 27.5 years)?

- if yes, what happens when I sell the entire house few years later? What is my cost basis? Is it = Original purchase price + cost of ADU development - depreciation as rental?

- what are typical financing strategies for building ADU? I have read Heloc is an option. But doesn't heloc's have much higher rates than typical mortgages? Are there cheaper financing options?

Thanks in advance.