What You Need to Know About Capital Gains When Renting Out Your Former Principal Residence

As life evolves, so do your housing needs. Whether you're downsizing, relocating, or making an investment move, many Canadians find themselves converting their former principal residence into a rental property. While this can be a great financial decision, it comes with its own set of tax implications—specifically, the capital gains tax.

Understanding these complexities is essential to protecting your wealth and avoiding unexpected tax bills down the road. Here, we’ll break down the basics of capital gains when renting out your former principal residence, and explain how a professional appraisal from Apex Appraisal can help you move forward with confidence.

Capital Gains Tax and Your Principal Residence

When you sell a property in Canada, the profit you make — known as a capital gain — may be subject to taxation. However, if the property is your principal residence, you can usually claim the principal residence exemption, which allows you to avoid paying capital gains tax. But what happens if you decide to rent out your principal residence instead of selling it?

The "Change In Use" Rule

The Canada Revenue Agency (CRA) considers renting out your former home as a "change in use" of the property. The property transitions from being your principal residence to an income property and the CRA will consider your property as having been sold at fair market value. This means any future increase in the property’s value from that point forward could be subject to capital gains tax when you eventually sell.

The good news? The CRA does allow for some flexibility. If the property was your principal residence for part of the ownership period, you may be eligible to to reduce or eliminate the taxable gain.

While there are ways to defer this tax — such as filing an election under Section 45(2) of the Income Tax Act — you’ll still need to establish the property’s fair market value at the time you begin renting it out. Be sure to consult with a professional accountant to discuss all of your tax options and obligations.

Regardless of these options, you’ll still need to establish the property’s fair market value at the time you begin renting it out. This is where a professional appraisal becomes invaluable.

Why a Professional Appraisal Is Crucial

A professional appraisal provides an accurate assessment of your property’s fair market value at the time of its “change in use.” This value becomes the baseline for calculating capital gains when you sell the property in the future. Without a precise and credible appraisal, you risk underestimating or overestimating your taxable gains, which could lead to financial penalties, or paying more tax than necessary.

At Apex Appraisal, we specialize in providing comprehensive, accurate and reliable property appraisals specifically for capital gains calculation purposes. Our team of appraisers understands the complexities of tax implications, and ensures that you have the property valuation information you need in this scenario.

How Apex Appraisal Can Help

Navigating the tax implications of renting out your former principal residence doesn’t have to be overwhelming. With a trusted advice from a professional accountant and an accurate appraisal from Apex Appraisal, you’ll have the expertise to determine your property’s fair market value, ensure compliance with CRA regulations, and minimize potential tax burdens.