Which property is taxed, and which is not

The single most important question is whether the property was your principal residence. If it was the home you genuinely lived in, the principal residence exemption usually wipes out the capital gains tax entirely. If it was anything else, the gain is taxable. Common taxable cases include:

• A second home or cottage you did not designate as your principal residence.
• A rental property or investment property.
• Vacant land held as an investment.
• A property you flipped — note that quickly bought-and-sold homes can be taxed as business income, not capital gains, which is harsher.

The flipping rule: sold within a year

Since January 1, 2023, Canada has a residential property flipping rule. If you sell a residential property you owned for less than 365 days, the profit is generally treated as business income rather than a capital gain. That matters a lot: business income is fully taxable, not just 50%, and the principal residence exemption does not apply. There are exceptions for major life events — a death, a separation, a new job, a serious illness, or a new child — but if you are simply selling quickly for profit, expect the harsher treatment.

How to calculate capital gains on a property sale

The calculation is the same three steps used for any asset, just with real-estate costs:

• Proceeds — the price you sold for.
• Adjusted cost base (ACB) — what you paid, plus purchase costs (legal fees, land transfer tax) and the cost of capital improvements like a new roof or addition. Ordinary repairs and maintenance do not count.
• Selling costs — real-estate commission and legal fees on the sale.

Subtract the ACB and selling costs from the proceeds to get the capital gain. Then take 50% of it (the taxable capital gain) and apply your marginal tax rate. For the full step-by-step on the inclusion rate and marginal rates, see our guide on how to calculate capital gains tax.

A worked example: selling a rental property

Say you bought a rental for $400,000 and sold it years later for $550,000. You paid $1,500 in legal fees on the purchase, spent $50,000 on a capital improvement (a new addition), and on the sale paid a 5% agent commission plus $1,500 in legal fees.

Notice how much the $50,000 improvement and the $29,000 of selling costs matter: without counting them, the gain would look like $150,000 instead of $69,500. Keeping records of what you spend on a property directly lowers the tax.

The principal residence exemption

This is the rule that keeps most home sales tax-free. If a home was your principal residence for every year you owned it, the exemption generally eliminates the capital gain. A few things are worth knowing:

• One per family, per year. A couple can only designate one property as their principal residence for any given year, so you cannot shelter both a house and a cottage at the same time.
• You must report the sale. Even when the gain is fully exempt, the Canada Revenue Agency requires you to report the sale of your principal residence on your tax return.
• Choosing wisely. If you own two properties that have both grown in value, you can choose which one the exemption applies to — usually the one with the larger gain per year of ownership.

You can confirm the details on the CRA’s principal residence page.

Extra wrinkles for rentals and cottages

A couple of situations need a closer look, and an accountant is worth it here:

• Rentals you claimed depreciation on. If you deducted capital cost allowance (depreciation) against rental income over the years, some of that can be added back to your income when you sell, on top of the capital gain. This is called recapture.
• Changing a home to a rental, or back. Converting your home into a rental (or a rental into your home) is treated as a deemed sale at fair market value, which can trigger tax even though no money changed hands. Special elections can sometimes defer this.
• A cottage you used personally. The gain is still taxable, but a loss on a personal-use property like a cottage is not deductible — so the tax treatment is not symmetrical.

Ways to reduce the tax

• Track every capital improvement. Renovations and additions raise your ACB and shrink the gain. Keep receipts.
• Claim your selling costs. Commission and legal fees come straight off the gain.
• Use the exemption strategically when you own more than one property.
• Offset with capital losses from investments sold the same year, which reduce the taxable gain.

The thread running through all of this is record-keeping, and it is where people lose the most money to tax. The CRA expects you to prove your adjusted cost base, so hold on to the purchase closing statement, receipts for every renovation and addition, and the final sale paperwork. A $50,000 improvement only lowers your gain if you can show you spent it — without proof, you may be taxed on a much larger gain than you actually made, sometimes years later if the sale is reviewed. For a property you have owned a long time, dig those records out before you list it.

When and how to report it

You report a property sale on your tax return for the year you sold it. A taxable gain on a second home, rental, or cottage goes on Schedule 3 with your other capital gains, and the tax is due by the normal filing deadline, with interest building on anything paid late. Even a fully exempt principal residence has to be reported, so the CRA can confirm the exemption.

Because the bill can be large, it is worth estimating it before you sell. You can run the numbers in our capital gains tax calculator, or browse our other free financial calculators to plan around the sale.

Frequently asked questions

Last updated: June 2026 · Based on the 50% capital gains inclusion rate. Confirm current rules with the CRA.