Principal residence

A property qualifies as your principal residence for any year if it meets all of the following conditions:

• It is a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you acquire only to get the right to inhabit a housing unit owned by that corporation
• 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

The land on which your home is located can be part of your principal residence. Usually, the amount of land that you can consider as part of your principal residence is limited to half of a hectare (1.24 acres). However, if you can show that you need more land to use and enjoy your home, you can consider more than this amount as part of your principal residence. For example, this may happen if the minimum lot size imposed by a municipality in any given year you owned the property is larger than half of a hectare.

The disposition must have occurred due to, or in anticipation of one of the following life events:

• the death of the taxpayer or a related person
• a related person joining the taxpayer’s household or the taxpayer joining a related person’s household (for example, moving in with a spouse or common-law partner, for the birth of a child, adoption, or care of an elderly parent)
• the breakdown of a marriage or common-law partnership where the taxpayer had been living separate and apart from their spouse or common-law partner for at least 90 days before the disposition
• a threat to the personal safety of the taxpayer or a related person (for example, domestic violence)
• a serious disability or illness of the taxpayer or a related person
• the eligible relocation of the taxpayer or their spouse or common-law partner where the taxpayer’s new home is at least 40 kilometres closer to the new work location or school (generally, an eligible relocation allows the taxpayer to carry on business, be employed or attend full-time post-secondary education)
• the involuntary termination of employment of the taxpayer or their spouse or common-law partner
• the insolvency of the taxpayer
• the destruction or expropriation of the taxpayer’s property (for example, when the property is destroyed due to natural or man-made disaster)

If the property is not considered a flipped property, whether the income from selling the property should be treated as business income or as a capital gain depends on the specific details of the situation. If the disposition is considered:

• a capital gain, complete Schedule 3, Capital gains or losses
• business income, complete Form T2125, Statement of Business or Professional Activities

For more information about flipped property, see Residential Property Flipping Rule.

For more information about business income, see Business income or Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income.

You (a resident of Canada) put your principal residence (property 1) up for sale in January 2025. Property 1 has been your only principal residence for all the time you have owned it. You purchased a new house (property 2) in February 2025 and took possession of it as your principal residence in March 2025.

There is a special rule (the “plus 1” rule) that allows a taxpayer to treat both properties as eligible for the principal residence exemption for a year where one residence is sold and another is purchased in the same year, even though only one of them may be designated as such for that year. For this reason, you can tick box 1 at line 17900 of Part 1 of Schedule 3 to designate property 1 as your principal residence for all years including 2025 (or for all years except one year).

In addition, you will need to complete the first page of Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust), assuming you finally sold property 1 before the end of 2025. However, you should keep your decision in writing for future reference, especially for when you sell property 2.

In 2025, you disposed of 3 properties. You acquired Property 1 in 2000 and you designated it as your principal residence from 2000 to 2005. You acquired Property 2 in 2006 and you designated this property as your principal residence from 2006 to 2010. You acquired Property 3 in 2011 and you designated it as your principal residence from 2011 to 2025. You must tick box 3 at line 17900 of Part 1 of Schedule 3, complete a separate Form T2091(IND) for each property, and report the capital gains (if any) on Schedule 3.

This example provides information on how to calculate the capital gain and your reporting requirements for the sale. This example will show you how to:

• treat the sale of property that was used partly as a principal residence and partly for earning income
• report a capital gain on the disposition of property that includes land and a building
• calculate a recapture of capital cost allowance (CCA) or a terminal loss on the disposition of depreciable property

In November 1988, you bought a duplex for $125,000. According to a municipal assessment completed just before the purchase, the entire property was valued at $100,000, the land was valued at $25,000, and the building at $75,000. From the date you purchased the duplex, you lived in the lower half and rented out the upper half. Based on the property's total number of square metres, you determined that the portion you used to earn rental income was 40%.

On July 28, 2025, you sold the property for $175,000. You incurred expenses of $10,500 to make the sale. According to a recent municipal assessment, the entire property was now valued at $150,000. The land was worth $30,000 and the building was worth $120,000.

Any gain on the part of the property that you used as your principal residence will not be taxed because you used that part of the property as your principal residence for all the years you owned it. You have to designate the part of the property that was your principal residence by ticking box 1 at line 17900 of Part 1 of Schedule 3, Capital Gains or Losses, and by completing Section 1 of Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust).

You have to calculate the capital gain on the part of the property that you rented out. You also have to determine if you have a recapture of CCA or a terminal loss on the rented portion of the building. For this reason, you will break down the rental portion of the purchase price, the selling price, and the related expenses between the land and the building. Keeping in mind that 40% of the property was used for rental purposes, you complete the following calculations:

1. Divide the rental portion of the purchase price between the land and the building, based on the municipal assessment at the time of the purchase:

   Building: (40%)  x ($75,000 ÷ $100,000) x $125,000 = $37,500
   Land: (40%) x ($25,000 ÷ $100,000) x $125,000 = $12,500

   Because the breakdown between the land and the building was not shown on his purchase agreement, you use the municipal assessment in effect at the time of the purchase. You would have completed this calculation at the time he purchased the property to determine the amount of CCA you could claim on the part of the building you rented out.

2. Divide the rental portion of the selling price between the land and the building, based on the municipal assessment at the time of the sale:

   Building: (40%) x ($120,000 ÷ $150,000) x $175,000 = $56,000
   Land: (40%) x ($30,000 ÷ $150,000) x $175,000 = $14,000

   The breakdown between the land and the building was not shown on your sale agreement. Because no renovations were made to the building since the last municipal assessment, you can use the municipal assessment that was in effect at the time of the sale.

3. Divide the rental portion of the expenses of the outlays and expenses relating to the sale between the land and the building, based on the municipal assessment at the time of the sale:

   Building: (40%) x ($120,000 ÷ $150,000) x $10,500 = $3,360
   Land: (40%) x ($30,000 ÷ $150,000) x $10,500 = $840

   You can now determine if you have a recapture of CCA or a terminal loss on the rented part of the building. The undepreciated capital cost (UCC) of the portion of the building used for rental purposes at the beginning of 2025 was $34,728. From the UCC, you subtract whichever is less:

   • the selling price of the rented part of the building minus the related outlays and expenses: $52,640 ($56,000 – $3,360)
   • the purchase price of the rented part of the building: $37,500

Calculate the amount as follow:

•  

  $34,728

   

  UCC at the beginning of 2025

  −

  $37,500

   

  Purchase price

  =

  $(2,772)

   

  Recapture of CCA

To help you complete the above calculations, you use the CCA schedule on Form T776, Statement of Real Estate Rentals.

You can now calculate your capital gain. To do this, you complete the section called "Real estate, depreciable property, and other properties" in Part 3 of Schedule 3, Capital Gains or Losses. You report the sale of the rental property in Part 3 by entering $70,000 ($56,000 + $14,000) as the proceeds of disposition on line 13599, and $15,800 ($15,140 + $660) as the capital gain on line 13800.

When you change your principal residence to an income producing property, such as a rental or business property, you can make an election not to be considered as having started to use your principal residence as a rental or business property. This means you do not have to report any capital gain when you change its use. If you make this election, you cannot claim capital cost allowance (CCA) on the property. Any income in respect of a property, net of applicable expenses, must be reported for tax purposes.

While your election is in effect, you can designate the property as your principal residence for up to four years, even if you do not use your property as your principal residence. However, during those years, you have to meet all of the following conditions:

• you do not designate any other property as your principal residence
• you are a resident or deemed to be a resident of Canada

You can extend the four-year limit indefinitely if all of the following conditions are met in addition to the above listed conditions:

• You live away from your principal residence because your employer, or your spouse's or common-law partner's employer wants you to relocate
• You and your spouse or common-law partner are not related to the employer
• You return to your original home while you or your spouse or common-law partner are still with the same employer, or before the end of the year following the year in which this employment ends, or you die during the term of employment
• Your original home is at least 40 kilometres (by the shortest public route) farther than your temporary residence from your, or your spouse's or common-law partner's, new place of employment

If you make this election, there is no immediate effect on your income tax situation when you move back into your residence. However, if you change the use of the property again and do not make this election again, any gain you have from selling the property may be subject to tax.

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.

If you started to use your principal residence as a rental or business property in the year, you may want information on how you should report your business or property income. If so, see the following guides:

• Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income
• Guide T4036, Rental Income

When you change your rental or business property to a principal residence, you can elect to postpone reporting the disposition of your property until you actually sell it. However, you cannot make this election if you, your spouse or common-law partner, or a trust under which you or your spouse or common-law partner is a beneficiary has deducted CCA on the property for any tax year after 1984, and on or before the day you change its use.

This election only applies to a capital gain. If you claimed CCA on the property before 1985, you have to include any recapture of CCA in your business or rental income, and the income in the year you changed the use of the property. For more information on the recapture of CCA, see the following guides:

• Guide T4002, Self-employed Business, Professional, Commission, Farming, and Fishing Income
• Guide T4036, Rental Income

If you make this election, you can designate the property as your principal residence for up to four years before you actually occupy it as your principal residence.

To make this election, attach to your income tax and benefit return a letter signed by you. Describe the property and state that you want subsection 45(3) of the Income Tax Act to apply. You have to make this election by the earliest of the following dates:

• 90 days after the date the CRA asks you to make the election
• the date you are required to file your income tax and benefit return for the year in which you actually sell the property

Before March 19, 2019, you could not elect to avoid the deemed disposition that occurs on a partial change in the use of a property. However, starting on March 19, 2019, depending on your situation, you can elect under subsection 45(2) or 45(3) of the Income Tax Act that the deemed disposition that normally arises on a partial change in use of property does not apply.

Even if you do not make the election, if you started to use part of your principal residence for rental or business purposes, the CRA usually considers you to have changed the use of that part of your principal residence unless all of the following conditions apply:

• Your rental or business use of the property is relatively small in relation to its use as your principal residence
• You do not make any structural changes to the property to make it more suitable for rental or business purposes
• You do not deduct any CCA on the part you are using for rental or business purposes

Generally, if you do not meet all of the above conditions, you will have a deemed disposition of the portion of property that had the change of use, and immediately after, you will be deemed to have reacquired that portion of property. The proceeds of disposition and the cost of the reacquisition will be equal to the proportionate share of the fair market value of the property, determined at that time. Additionally, in the year the partial change in use occurs, you can make a principal residence designation (for the portion of the property that had the change in use), by completing Part 2 of Schedule 3, Capital Gains or Losses, and page 2 of Form T2091(IND), Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust).

Subsequently, when you actually sell the property you have to take all of the following actions:

• Split the selling price between the part you used for your principal residence and the part you used for rental or business purposes. The CRA will accept a split based on square metres or the number of rooms as long as the split is reasonable
• Report any capital gain on the part you used for rental or business purposes. You can also make a principal residence designation for the portion of the property for which there was no change in use as your principal residence, by completing Schedule 3 and Form T2091(IND), in order to claim the principal residence exemption for that portion of the gain. For more information, see Real estate, depreciable property, and other properties. You do not have to report any capital gain for the part you used for your principal residence