Turning Your Home Into a Rental, or Moving Into One

Is renting out my home treated as selling it for tax?

Yes. When you change your entire home from personal use to rental use, you are normally deemed to sell it at fair market value—the price an independent buyer would pay on the open market—and buy it back immediately for that value. No money has to change hands. The same rule normally applies in reverse when you move into a rental property (Income Tax Act, section 45(1); CRA: Fair market value).

Where a deemed sale applies, its fair market value separates the gain before the change from later appreciation. Record the property's value when its use changes, even if an election prevents a deemed sale then. The election does not reset its cost; if a section 45(2) election is later rescinded, the deemed sale occurs on the first day of that later tax year (CRA: Principal residence folio; CRA: Capital gains records).

These rules address an entire property. A rented room or basement can produce a different result; see Principal residence exemption.

Do I owe tax on the deemed sale if the house was always my home?

Often the principal residence exemption can eliminate the gain up to the change date if the property qualified and your family did not designate another home for those years. The deemed sale still has to be reported and the home designated; an exempt gain does not excuse the filing (CRA: Principal residence).

Complete Schedule 3 and Form T2091(IND) for the deemed-sale year. If you designate the home for every year you owned it and the gain is fully exempt, complete Schedule 3's principal residence designation and Section 1 of T2091; do not enter the gain amount on Schedule 3. Attach T2091 to a paper return, or keep it in case the CRA asks if you file electronically (CRA: Schedule 3; CRA: Form T2091(IND)). If the home was not eligible for every year you owned it, some of the gain may be taxable. A personal-use loss on the former home is generally not deductible (CRA: Principal residence). For the designation and calculation, see Principal residence exemption.

How does a section 45(2) election delay tax when my home becomes a rental?

A section 45(2) election treats your home as though its change to income-producing use did not happen for the deemed-sale rule. You therefore do not report a capital gain from the change when it occurs; a gain may arise when you actually sell or when the election is rescinded (Income Tax Act, section 45(2); CRA: Principal residence folio).

The election does not turn rent into tax-free income. Report rental income and eligible expenses from the time the property is rented. See Rental income for the annual return (CRA: Capital Gains guide).

An election postpones the gain; it does not guarantee that the eventual gain is exempt. The years you may designate for this property, your Canadian residence, and any other home owned by your family determine the exemption at disposition (CRA: Principal residence folio).

How long can my former home qualify as a principal residence while rented?

With a section 45(2) election in force, a former home can qualify for up to four tax years when no eligible family member lives there. A non-resident can still make the election and may designate the home, but Canadian residence affects how much of the gain the exemption can shelter (CRA: Principal residence folio).

The election keeps those rental years eligible; it does not designate them automatically. You choose the years when reporting a sale or deemed sale. Your family cannot designate another home for the same year (CRA: Principal residence folio; Income Tax Act, section 54).

After those four years, the election can remain in force, but additional years without qualifying occupancy generally cannot be designated under this rule. There is no automatic deemed sale merely because the four years expire. At the eventual sale, part of the gain may be taxable. Designating rented years for the former home also uses years that the family cannot designate for a new home (CRA: Principal residence folio).

An employer relocation can remove the four-year limit, but only if the conditions in section 54.1 are met. The move must result from your or your spouse's or common-law partner's employment relocation; the employer must be unrelated; the former home must be at least 40 kilometres farther from the new workplace than the later residence, measured by the shortest public route; and you must return to the former home during that employment or by the end of the following tax year after it ends, unless death occurs during employment (Income Tax Act, section 54.1; CRA: Capital Gains guide). A personal choice to move does not satisfy the employment condition.

Can I claim CCA while a section 45(2) election is in place?

No. Claiming capital cost allowance (CCA) on the property rescinds the section 45(2) election from the first day of the tax year in which CCA is claimed. That can trigger a deemed sale at fair market value in that year (CRA: Principal residence folio).

Check past rental returns before assuming an election remains effective. If you want to assess CCA after ending the election, the building's capital cost has its own change-of-use rule; it is not automatically the full fair market value. See Capital cost allowance for the claim and class rules (CRA: Principal residence folio).

What tax applies when I move into my rental property?

Moving into an entire rental normally causes a deemed sale and reacquisition at fair market value. A gain that built up while it was a rental may be taxable in the change year. If you claimed capital cost allowance (CCA), a deduction for the building's cost over time, moving in can also cause recapture: some earlier deductions are added to rental income. The principal residence exemption does not shelter that income (CRA: Principal residence folio; CRA: Rental income).

For a rental that was never your principal residence before you moved in, the principal residence exemption does not erase the earlier rental gain simply because it becomes your home. The deemed reacquisition sets a new cost for later capital-gain purposes. If you previously elected under section 45(2) when converting the same home to a rental and that election is still in force, moving back does not itself create a new deemed sale (CRA: Capital Gains guide).

When can a section 45(3) election defer the gain on moving in?

Section 45(3) can defer the capital gain from a rental-to-home change until an actual sale. It cannot be used if CCA for the property was allowed to you, your spouse or common-law partner, or a trust of which either of you is a beneficiary for a tax year ending after 1984 and on or before the change in use (Income Tax Act, sections 45(3) and 45(4)).

If eligible, the property may also qualify as a principal residence for up to four years before you moved in, while it was rented. Your family cannot designate another home for the same year, and Canadian residence affects how much of the gain the exemption can shelter. An election to defer the capital gain does not defer any CCA recapture that arises on the change (CRA: Principal residence folio).

How do I make an election, and can I file it late?

Make either election with a signed letter that identifies the property and says which subsection you elect under. There is no separate CRA election form. The filing time differs (CRA: Capital Gains guide; CRA: Taxpayer Relief Provisions).

If a return is filed electronically, submit the signed election letter separately in writing to the CRA tax centre; keep proof of delivery. CRA's EFILE instructions distinguish election documents from ordinary records that you retain until requested (CRA: EFILE election documentation).

The CRA may accept a late section 45(2) or 45(3) election within its 10-year relief time limit, but acceptance is discretionary and a penalty may apply. A late section 45(2) election is especially difficult if CCA was claimed during the period it would cover. The request needs the signed election, an explanation, supporting records, and any affected return schedules (CRA: Taxpayer Relief Provisions; CRA: Principal residence folio).

For Quebec residents, a federal election applies automatically under Quebec law, but Revenu Québec requires a separate signed notice and a copy of the federal election. Its instructions list the change-year return deadline or 30 days after the CRA election for section 45(2), and the actual-sale-year return deadline or 30 days after the CRA election for section 45(3). A section 45(3) election also requires Form TP-274-V (Revenu Québec: Form TP-274-V instructions).

What do I report and keep in the year the use changes?

The return depends on whether there is a deemed sale. Report it on Schedule 3 and, for a qualifying former home, complete Form T2091(IND). If an election prevents the deemed sale, file its letter at the deadline instead. If you are a Canadian resident, report rent and expenses for the rental period using Form T776 or an equivalent statement; non-residents have separate withholding and section 216 return rules. See Rental income and Non-resident landlords for those filings (CRA: Rental income; CRA: Section 216).

The current CRA principal residence instructions require Schedule 3 and Form T2091(IND) for a deemed sale of a principal residence, even when the gain is fully exempt (CRA: Principal residence). In Quebec, a principal residence designation on a deemed sale also calls for Form TP-274-V and Schedule G; confirm the election and designation records match across returns (Revenu Québec: Form TP-274-V).

Keep the purchase contract and costs, improvement receipts, evidence of fair market value at each change date, separate land and building values where CCA is relevant, move and tenancy dates, rental returns and CCA schedules, signed election letters and delivery proof, and a list of the years your family designated each property. Those records support the deemed-sale value, election eligibility, and later exemption calculation (CRA: Principal residence folio).

Example

Illustrative amounts in Canadian dollars; no income tax rate is assumed.

You bought a home for C$400,000. When you moved out and rented the entire property, its fair market value was C$600,000. You had lived there throughout ownership, and your family had not designated another home for those years. Without a section 45(2) election, the change produces a C$200,000 deemed gain. A qualifying principal residence designation could eliminate that gain, but you still report the deemed sale on Schedule 3 and Form T2091(IND). Your cost for later capital-gain purposes becomes C$600,000.

If you instead make a valid section 45(2) election, you do not report that C$200,000 deemed gain at the change. You report the rent each year and do not claim CCA. Suppose you sell for C$700,000 after three full rental years. The election did not reset the property's cost to C$600,000, so the gain before selling costs and any exemption is C$300,000. Whether the exemption eliminates it depends on which years your family designates for this home and any other home.

In the reverse case, suppose you bought a rental for C$400,000 and move in when it is worth C$600,000. Without a section 45(3) election, the change produces a C$200,000 deemed gain before costs. If eligible, the election delays that gain until sale; moving in alone does not erase it.

Different for you?

• You rented only a room or basement: a partial change has different rules. See Principal residence exemption.
• You need the exempt portion of a later gain: see Principal residence exemption.
• You need to report rent or choose a CCA class: see Rental income and Capital cost allowance.
• You are selling the rental now: see Selling a rental property for the sale and any CCA recapture.
• You sold a recently bought home: the residential flipping rule may change the character of the gain. See Property flipping and assignment sales.
• You are moving abroad or already live outside Canada: see Leaving Canada and Non-resident landlords before renting the home.
• You are renting out a new or substantially renovated home: GST/HST can have separate change-of-use rules. See GST/HST on residential property.
• CCA was claimed, an election is late, or two homes compete for the same years: these facts can change the tax and the filing. Gather valuation, CCA, occupancy, and election records for tax preparation.