Will you owe capital gains when you sell your home? Maybe. It depends on whether or not your home has been your principal residence all the while you’ve owned it and whether or not you’ve used part of it to produce income.
If your home is and has been your principal residence when you sell it, you don’t have to pay any capital gains tax.
So what is a principal residence?
It can be a house, an apartment, a condo or a mobile home – it doesn’t matter as long as it meets all of these conditions:
- You own the property alone or jointly with another person.
- You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.
- You designate the property as your principal residence.
Designating your home as your principal residence is just a matter of filling out a form when you sell. So if you buy a house, for instance, live in it for a number of years and then sell it, tax-wise your situation is very simple; you claim the principal residence exemption and have no capital gain.
But what if, instead, you rented out your home for a few years? Then it becomes more complicated tax-wise. When you rent your home, you are changing its use from a principal residence to a rental or business operation and are deemed to have sold the property at its fair market value and to have immediately reacquired the property for the same amount – triggering a capital gain that you have to report in the year the change of use occurs.
Fortunately, you can get around this by filing a 45(2) election, which allows you to treat the original house as your principal residence for up to four years as long as you don’t claim depreciation and you are resident in Canada, even though the property is being rented and you are not living in the property. ( See
To make this election, attach a letter signed by you to your income tax and benefit return of the year in which the change of use occurs. Describe the property and state that you want subsection 45(2) of the Income Tax Act to apply.
Bear in mind, though, that you have to live somewhere – and if you use a 45(2) election on the home that you’re renting out, you won’t be able to claim the principal residence exemption on the new house you’re living in, so when you eventually sell it will be partially taxable.
If you’re a Canadian with one or more properties, the principal residence exemption can be your best tax break ever. While you can only have one principal residence per year (and spouses can’t have separate ones), because you don’t have to live in a home full-time to have it qualify as a principal residence and can pick whichever property you want as your principal residence, you could save a bundle on your tax bill.
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