Principal residence exemption: When a home sale is tax-free

What counts as a principal residence?

A principal residence is a home you own, alone or with someone else, that you, your current or former spouse or common-law partner, or your child ordinarily lived in during a year you designate it. A house, condo, cottage, apartment, mobile home or houseboat can qualify; it need not be where you spend most of the year (CRA: principal residence; Income Tax Act, section 54).

Living there briefly can meet the ordinary habitation test, but the facts matter. A property held mainly to earn income will not generally qualify through your own brief stay. Occupation by your child can still qualify if the other conditions are met (CRA folio, paragraphs 2.10–2.11).

Can my family have more than one tax-free home for the same year?

Your family can generally designate only one home for a year, even if family members own different homes. Both gains may still be fully sheltered when you sell one home and buy another in the same year: the formula's extra year can cover the overlap if its conditions are met. It does not allow two designations for the same year. Your spouse or common-law partner shares that limit if they were your spouse or partner throughout the year. A child shares it only if under 18, unmarried and without a common-law partner throughout the year (Income Tax Act, section 54).

Spouses or partners who lived apart for the entire year under a court order or written separation agreement are outside each other's family unit for that year. An adult child generally has a separate family unit, but that does not give a parent an extra designation for a second property the parent owns (CRA folio, paragraph 2.13).

We own a house and a condo or cottage: which should we designate?

List each home's eligible years and prior family designations. For overlapping years, compare how much each home's exemption would increase if it received the year, then calculate both full outcomes, including the extra-year rule. A cottage can be the better designation even if you spend more time in the house (CRA folio, paragraphs 2.13, 2.20 and 2.28).

Keep a year-by-year record of both homes and any designations already filed. The choice affects the future sale of the home you keep (CRA folio, paragraphs 2.13 and 2.20).

How is the tax-free part of the gain worked out?

First calculate the capital gain: sale proceeds minus selling costs and the home's adjusted cost base. That cost base generally starts with the purchase price and acquisition costs, such as legal fees, and adds capital improvements; routine repairs do not increase it (CRA: Capital Gains guide). For an ordinary qualifying home bought in a year you were resident in Canada at any time, the exemption is generally the gain multiplied by (one plus designated years while resident in Canada) divided by ownership years, capped at the gain. Count every calendar year of ownership, including the purchase and sale years (Income Tax Act, section 40(1)–(2); CRA folio, paragraphs 2.20–2.21).

The extra year helps when eligible homes overlap during a move; it does not let the family designate two homes for the same year. If you were not resident in Canada during the acquisition year, that extra year does not apply. Canadian residence during other designated years also matters (Income Tax Act, section 40(2)(b)). A property with a historic capital gains election can require another adjustment (CRA folio, paragraphs 2.22–2.26).

Can I designate a condo that my child lives in?

Yes, a condo you own can meet the habitation condition when your child ordinarily lives there, even if you live elsewhere. You must still designate that condo for the relevant years, and those years cannot also go to another home in your family unit (Income Tax Act, section 54; CRA folio, paragraphs 2.11–2.13).

Your child's age does not remove the requirement that you own the condo. If your adult child owns it instead, the child's own designation is a separate question. If you charge rent, report the rent and review the property's income use; the CRA says a child-occupied rental can still meet the habitation condition, but the other exemption conditions remain (CRA folio, paragraphs 2.9–2.11).

Is the whole home tax-free if I rent a suite or work from home?

Renting a room or using a home office can leave the whole property eligible. Under CRA practice, income use must be secondary to living there, with no structural change and no capital cost allowance (CCA), the tax depreciation deduction on the building. Creating a self-contained rental suite is a structural change that can put the rental portion outside this treatment (CRA folio, paragraphs 2.58–2.60).

If a separate income-use portion does not qualify, part of the gain may be taxable and a reasonable allocation may be needed. A substantial partial change in use can also trigger a deemed sale of that portion before the actual sale. A section 45(2) election can defer it: the owner signs a letter filed with the change-year return. For a change back to residential use, a section 45(3) election instead needs the owner's signed letter with the eventual sale-year return, or earlier on CRA demand. See Turning a home into a rental for these elections (CRA folio, paragraphs 2.57–2.60.2). For how to report the rent, see Rental income.

What if my lot is larger than half a hectare?

The home and up to half a hectare of land can generally qualify. Land beyond that qualifies only to the extent you establish it was necessary to use and enjoy the home as a residence; wanting a larger yard is insufficient (Income Tax Act, section 54(e); CRA folio, paragraphs 2.32–2.33).

Access to a public road, a minimum lot size or a subdivision restriction may support a claim for more land. Gather the relevant rules and property records. If the excess does not qualify, allocate the gain by value, which may differ from a simple acreage split (CRA folio, paragraphs 2.34–2.37).

Land used in a farming business has separate gain methods. One is a section 40(2)(c)(ii) election made by an owner-signed letter with the sale-year return (CRA folio, paragraphs 2.38–2.46).

How do I report the sale on my return?

Report a sale or deemed sale and designate the property even when the exemption covers the full gain. Under the latest published federal instructions, which cover 2025 dispositions, complete Part 2, Principal residence, of Schedule 3 and Form T2091(IND) for the sale year. Paper filers sign and attach T2091(IND); electronic filers keep it. Report any remaining gain in Schedule 3's capital-gains section. If you designate the home for all ownership years or all but one (box 1 at line 17900), complete only Section 1 of T2091(IND), including its designation and signature (CRA: Form T2091(IND)).

Québec requires Form TP-274-V and Schedule G with the Québec return for the year of sale. For designation years covered by a change-in-use election, keep proof of the matching CRA election. Keep purchase and sale statements, improvement receipts, dates of occupation, prior returns and a list of other family homes and designation years. A loss on a personal-use home generally cannot be claimed (CRA: principal residence).

If you or your spouse or common-law partner filed Form T664 or T664 (Seniors) for a home acquired before February 23, 1994, use Form T2091(IND)-WS to check the historic election adjustment (CRA folio, paragraphs 2.22–2.25).

I forgot to report or designate the sale: what now?

If the sale-year return has been assessed, ask the CRA in writing to accept the late designation and adjust that return. Explain why it is late and include the corrected Schedule 3 and Form T2091(IND). Send the request through CRA Submit documents or by mail to your tax centre; Change my return alone cannot make or revise an election (CRA: taxpayer relief, paragraphs 55 and 58–60; CRA: changing a return). Acceptance is discretionary, and a penalty can apply. The federal penalty is the lesser of $8,000 or $100 for each complete month from the original due date to a satisfactory application (Income Tax Act, section 220(3.2), (3.21) and (3.5)).

The federal late-designation request generally must be made within ten calendar years after the end of the tax year (Income Tax Act, section 220(3.2)). If a real estate sale was omitted, the CRA can reassess the sale beyond the normal period; after an amended return reports it, the Act provides a further three-year reassessment window for that disposition (Income Tax Act, section 152(4)(b.3)).

For Québec, ask Revenu Québec how to correct a missed designation. Its stated penalty for not sending TP-274-V is $100 a month, up to $5,000 (Revenu Québec).

Example

Illustrative amounts in Canadian dollars. A family bought a cottage for C$200,000 in Year 1 and sold it for C$500,000 in Year 10, with no selling costs or improvements. They owned it during ten calendar years, including the purchase and sale years. The gain is C$300,000. The cottage qualified for six years that the family chose to designate; no family member designated another property for those years. They were resident in Canada during the acquisition year and each designated year.

The federal exemption is C$300,000 × (1 + 6) ÷ 10 = C$210,000. The remaining capital gain is C$90,000 before applying the capital gains inclusion rules. The family cannot use the same six designation years for its house when it later sells that house. The cottage sale still goes on Schedule 3 and Form T2091(IND) (Income Tax Act, section 40(2)(b); CRA: principal residence).

Different for you?

• You sold after holding it less than 365 consecutive days: the gain may be business income under the residential property flipping rule, subject to exceptions. See Property flipping and assignment sales.
• You moved out and rented the home, or moved into a rental: a change in use can create a deemed sale or an election. See Turning a home into a rental.
• You gifted the home or added a child to title: a transfer can count as a disposition. See Transferring property to family.
• Your home is outside Canada: residence status and property location need separate review. See Property outside Canada.
• You were a non-resident when you sold Canadian property: withholding and clearance rules may apply. See Non-residents selling Canadian property.
• You are a US citizen selling a Canadian home: the US may also tax the sale. See US tax on property abroad.
• You built or substantially renovated the home: GST/HST may change the sale. See GST/HST on residential property.
• The CRA has already contacted you: respond to the letter and its deadline. See Reviews, audits and voluntary disclosure.
• You have two homes, an income-use portion or a late designation: gather both properties' purchase and sale records, occupancy years, improvement costs and prior designations for tax preparation.