Am I Required to Pay Tax on My Rental Property When I Sell ?

For many people, selling your house is often the highest injection of income that you will receive at one time in your lifetime. Such a large sum of income can potentially trigger a hefty tax bill. However, CRA as provided opportunity to relieve and even avoid any tax paid on the sale of your house. Here are some things you should know before putting your house up for sale.

Do I Pay Tax on The Income I receive from selling my house?

The vast majority typically do not pay tax on the full amount of proceeds from the sale of there home as CRA has provided a two provisions in order to alleviate paying tax on all the proceeds. The first provision is taxable capital gains. Gains from the sale of a second property (non primary residence) is considered a capital gain. Capital gains are taxed at 50% of the gain. See illustration below:

You purchase your a second home (which is not where you reside) for $100,000 and sell it 5 years later for $150,000. The gain on the sale of the home would be $50,000. The gain of $50,000 would be considered a capital gain and as a result only $25,000 would be taxable.

The other Tax relief provision allowed by CRA is the Principal Residence Exemption (PRE). The PRE allows for tax exemption on the gains from the proceeds you receive from selling your home, if the residence was your principal place of residence during the time of ownership. Principal place of residence essentially means it was where you lived. So if you own one house, that would be were you lived during the time you owned the property, thus qualifying as your principal residence, and therefor can be sold completely tax free! Only one property can be designated your principal residence per year. Tax liabilities may be triggered in the year(s) where the property was not your principal residence. Examples of such situations include second or third properties owned and rented out to tenants in order to generate income, or properties in which you live but also rent out a portion of the house. Let’s look some common PRE examples below.

I own two properties; I live in one full time and rent the other full time.

The property you live in full time would be considered your principal residence and therefore you would not pay tax on this property when you dispose of the home. The second property is not where you live and will have to pay tax on the capital gain (50% of the gain taxable) when the house is sold.

I own two properties; I lived in one full time for some of the years prior to selling and lived in the other the remaining years.

Only one property per year can be designated as your principal residence. If you owned two properties for 10 years and you lived in property A for 6 years and then moved to property B for the remaining 4 years, you pay tax on Property A for 4 years (tax on 40% of proceeds) and tax on property B for 6 years (tax on 60% of proceeds).

I own one property; I live upstairs, and I rent out the lower portion of the home.

The portion of the home designated for rent would not qualify as principal residence. In the event that you were to rent out your basement, and your basement takes up 1/3 of three-story home, 1/3 of proceeds from sale of the property would not qualify for the PRE and would as a result be taxable.

The PRE is a major consideration to take into account when considering selling rental property or primary residence.

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