Some homeowners use to loans from their retirement plan to help finance the costs of an ADU. Homeowners should consult with their retirement plan administrator to see if their retirement plan has a loan provision. Many plans allow you to borrow a percentage of your vested balance, up to a defined loan limit. These loans can be a quick and inexpensive form of financing but must be paid back in order to avoid a tax liability associated with the distribution. Some plan allow the homeowner to repay the plan through payroll deductions or in a lump sum. Under any circumstance, homeowners should have a plan to repay this type of loan to avoid a tax penalty

In addition to loans from retirement plans, homeowners often rely on loans from family or friends to pay for an ADU. This type of loan is particularly useful if a family member intends to live in the ADU and the extended family is pooling resources to build the ADU. If this is truly a loan, then a plan should be established to repay the loan, especially if the income generated from the ADU won’t be sufficient to cover the expected repayment of the loan.