Capital Gains and Your Home: The Principal Residence Exemption

When you sell the home you live in, the principal residence exemption usually means no tax on the gain, if the home qualified and you report the sale. Here is how it works for Canadian residents, from the one-home-per-family rule and the "plus one" formula to rentals, large lots and the flipping rule.

The short version

What counts as a principal residence

The Canada Revenue Agency (CRA) says a property can be your principal residence for a year if it meets these conditions:

• It is a housing unit. A house, condo, townhouse, apartment, cottage, mobile home, trailer or houseboat. A leasehold interest in one, or shares in a housing co-op bought only to live there, can also qualify.
• You own it, alone or jointly.
• Your family lived in it. You, your spouse or common-law partner, a former spouse or partner, or your child lived in it at some time during the year. A short stay can be enough, so a summer cabin can qualify, unless you own it mainly to earn income.
• You designate it, when you sell it or are considered to have sold it.

Only years you were resident in Canada count toward the exemption.

Reporting the sale on your tax return

Since the 2016 tax year, you have to report the sale of your principal residence on your return for the year you sell, even when the whole gain is exempt. CRA allows the exemption only if you report the sale and the designation.

• Schedule 3. Report the date you acquired the home, the proceeds and a description of the property.
• Form T2091(IND). If the home was your principal residence for every year you owned it, or every year but one, complete only page 1. Otherwise, the rest of the form works out the part of the gain you must report.
• If you forget. Ask CRA to amend your return. CRA can accept a late designation in some cases, but a penalty may apply: $100 for each complete month since the original due date, up to $8,000.

A home is personal-use property, so if you sell it at a loss, you can't claim the loss.

One home per family each year

For 1982 and later years, a family unit can designate only one home for any year. Your family unit generally includes you, your spouse or common-law partner, unless you lived apart all year under a court order or a written separation agreement, and your children under 18 who are not married or in a common-law partnership.

So with a home in the city and a cabin, your family can't designate both for the same year, and years used for one can't be used later for the other. If you are separating, I cover the home in Separation and the Family Home.

The "plus one" formula

The exempt part of your gain is the gain multiplied by one plus the number of years you designate, divided by the number of years you owned the home, counting every calendar year from purchase to sale. The extra one covers the year you move, when you usually own two homes but can designate only one.

• A moving year. You bought in 2018 and sell in 2026, the year you buy your next home, so you owned it for 9 years. Designate it for the 8 years from 2018 to 2025: (1 + 8) divided by 9 covers the whole gain, leaving 2026 for your new home.
• A partial designation. On an example gain of $300,000, for a property owned for 10 years and designated for 6, the exempt part is $300,000 x 7 divided by 10, or $210,000. The other $90,000 is a capital gain, and half of it, $45,000, is added to your income.

For sales after October 2, 2016, the extra year applies only if you were resident in Canada in the year you bought the home.

Renting out all or part of your home

If you turn your home into a rental, or move into a home you have been renting out, you are generally treated as having sold it at fair market value and bought it back. Two elections can postpone that:

• Home to rental, subsection 45(2). You elect that the change doesn't count. You report the rent but can't claim capital cost allowance, which is tax depreciation, on the property. You can keep designating it as your principal residence for up to four years, or longer in some job relocations, if you don't designate another home and you stay a resident of Canada. You elect with a signed letter attached to your return for the year of the change.
• Rental to home, subsection 45(3). You can postpone the gain until you sell, and designate the home for up to four years before you moved in. It isn't available if you, your spouse or common-law partner, or a trust for either of you claimed capital cost allowance on it after 1984 and before you moved in. You must elect by the earlier of your filing due date for the year you sell and 90 days after CRA asks.

Renting out a room or running a home daycare usually doesn't affect the exemption, if that use is small compared with your use of the home, you made no structural changes for it and you claimed no capital cost allowance on that part. A self-contained suite you rent out, or depreciation you claimed, can mean part of the home isn't covered. When you sell, you split the price and costs between the two parts, for example by square metres or rooms, and report the gain on the rental part. Since March 19, 2019, the elections can also apply when only part of the home changes use. I explain suites in Buying a Home with a Suite.

Land over half a hectare

The land under and around your home is included up to half a hectare, about 1.24 acres. Extra land counts only if you can show it is necessary for the use and enjoyment of the home, not just desirable:

• Minimum lot sizes. If a municipal or provincial rule requires a larger lot, or won't let you split off one of half a hectare or less, the extra land is normally included for those years.
• The home itself. Extra land can qualify if the size, character or location of the home makes it essential, or if it is needed for access to a public road.

Land used for a business or a rental generally doesn't qualify, and farmland with a home on it has its own rules, so speak with an accountant before you sell an acreage.

Owning for less than a year

Under the federal residential property flipping rule, since January 1, 2023, the profit on a home in Canada that you owned for less than 365 consecutive days is generally business income: fully taxable, with no principal residence exemption. The rule doesn't apply if you sell because of a life event, such as a death, a separation after at least 90 days apart, a serious illness, an involuntary job loss or a move for work or study. Even then, and for homes owned longer, whether the profit is business income or a capital gain depends on the facts.

BC's home flipping tax is separate. It can apply to homes sold less than 730 days after you bought them, and in most cases needs its own return within 90 days of the sale. I explain it in BC's Home Flipping Tax.

When part of the gain is taxable

Any part of the gain the exemption doesn't cover is a capital gain, and the Income Tax Act includes half of it in your income for the year you sell. A proposed increase to two thirds on gains above $250,000 a year was cancelled by the federal government in March 2025 and never took effect.

• Your cost. Generally what you paid, plus buying costs such as legal fees, plus additions and improvements, but not repairs or maintenance.
• Selling costs. Commission, legal fees and advertising come off your proceeds.

Keep your purchase and renovation records, and if you have rented the home or owned two properties, talk to an accountant before you list.

Questions sellers often ask me

Do I have to report the sale of my home if no tax is owed?

Yes. CRA has required it since the 2016 tax year; you use Schedule 3 and Form T2091(IND) for the year you sell. If you forget, ask CRA to amend your return; a late designation can bring a penalty of up to $8,000.

Can my spouse and I each designate a home?

Not for the same year, unless you lived apart all year under a court order or a written separation agreement. Since 1982, a family unit can designate only one home a year.

Can a cabin be my principal residence?

Yes, if you own it, your family lived in it at some time in the year, even briefly, and you don't own it mainly to earn income. You can't designate it for the same years as your other home.

Does renting out my basement affect the exemption?

Renting a room usually doesn't, if the rental use is small, you made no structural changes and you claim no capital cost allowance. A self-contained suite, or claiming depreciation, can make part of the gain taxable.

How much of a capital gain is taxable in 2026?

Half. The inclusion rate is one half under the Income Tax Act, and the proposed increase to two thirds on gains over $250,000 was cancelled in March 2025.

Planning a sale? Read What It Costs to Sell a Home in BC and the BC selling process from listing to completion, or request a free home evaluation.

This article is general information, not tax advice. The rules come from CRA's guidance and the Income Tax Act and were current at the time of writing. For CRA's guide, see principal residence and other real estate.