Principal Residence Exemption: Sell Your Home Tax-Free in Canada

Selling your home is one of the few times in Canadian life where you can pocket a very large capital gain without paying a cent of tax. The principal residence exemption is why. But the rules are more nuanced than "sell your house, pay no tax" — and getting them wrong is expensive.

What is the principal residence exemption?

When you sell a property that qualifies as your principal residence for every year you owned it, the capital gain is completely exempt from tax. For a home bought at $350,000 and sold for $950,000, that's a $600,000 gain that never touches your T1.

This is Canada's most valuable personal tax shelter.

What qualifies as a principal residence?

A property qualifies as your principal residence for a given year if all four conditions are met:

1. It is a housing unit, leasehold interest, or share in a co-operative housing corporation
2. You or a qualifying family member (spouse, common-law partner, child) ordinarily inhabited the property during the year
3. You were a resident of Canada during the year
4. You designate the property as your principal residence for that year (on Form T2091)

The land associated with the home can also be part of the principal residence, up to half a hectare. If you need more land to use and enjoy your home (e.g., a minimum lot size imposed by a municipality), you may be able to include more.

Only one principal residence per family per year

Since 1982, a family unit (you, your spouse or common-law partner, and unmarried children under 18) can only designate one property as a principal residence for each calendar year. You cannot designate both your city condo and your cottage as principal residences in the same year.

This is the key constraint for Canadians who own a primary home and a vacation property.

The exemption formula

If you owned the property for more years than you've designated as your principal residence, you get a partial exemption:

Exempt fraction = (1 + years designated as PR) ÷ total years owned
Exempt gain = Capital gain × exempt fraction (capped at 100%)

The "+1" is the CRA's "plus one rule" — it accounts for a transition year when you're selling one home and moving into another in the same year.

Example:

• Bought in 2010, sold in 2025 → 15 years owned
• Rented out for 3 years, designated as PR for 12 years
• Exempt fraction = (1 + 12) ÷ 15 = 13/15 = 86.7%
• Capital gain = $400,000 → Exempt = $346,667 → Taxable gain = $53,333
• Taxable capital gain = $53,333 × 50% = $26,667

Use the principal residence exemption calculator to see exact numbers for your situation.

Flipped property — the exemption does NOT apply

Since 2023, if you sell a housing unit within 365 consecutive days of purchasing it, it is automatically classified as a "flipped property." The income is taxed as business income — fully taxable, no principal residence exemption, no capital gains inclusion rate benefit.

Exceptions apply if the sale was required by death, divorce, a new job requiring relocation, insolvency, or other life events listed in the Income Tax Act.

Part-time rental use

If you rent out part of your home (e.g., a basement suite) while living there, you may still qualify for the full exemption, provided:

• The rental portion is incidental to your main use
• You have not structurally altered the property
• You have not claimed CCA on the property

If the above conditions are not met, you must split the selling price and ACB between the personal-use and income-producing portions, and only the personal-use portion benefits from the principal residence exemption.

Changing use

When you move from living in your home to renting it out (or vice versa), you are considered to have disposed of it at fair market value — a "deemed disposition." This can create a capital gain (or loss) that must be reported.

There is an election available (under subsection 45(2)) to defer this deemed disposition for up to 4 years — but you cannot claim CCA while the election is in effect, and you cannot designate another property as your principal residence during those years.

Reporting requirements

Since 2016, the CRA requires you to report every home sale on Schedule 3 and complete Form T2091(IND) to make the principal residence designation. This is mandatory even if the gain is fully exempt.

Failure to report results in denial of the exemption plus a penalty of up to $8,000.

Related guides and tools

• Principal Residence Exemption Calculator
• Canadian Capital Gains Tax Calculator
• How Capital Gains Tax Works in Canada (2025)
• Capital Gains Inclusion Rate — History & 2025
• Lifetime Capital Gains Exemption Canada 2025
• Capital Losses — Carryback & Carryforward