Rental income and the sale: how the tax works
Rental property is taxed in two places: on the rent while you own it and on the gain when you sell. Here is how each works.
How it works, in three steps
- 1Rent minus expenses is taxed as income. The expenses you can deduct include mortgage interest, property tax, insurance and repairs. Repaying the mortgage principal is not deductible.
- 2Depreciation is optional, and it can come back. Capital cost allowance (CCA) lets you deduct part of the building's cost each year, but it cannot create or increase a rental loss. When you sell, any CCA you claimed that the sale price now exceeds is recaptured and added to your income.
- 3On a sale, the profit is a capital gain. Half of it is taxable. There is generally no principal residence exemption for a property you only rent out.
Claiming depreciation lowers your tax now and can raise it when you sell, so it is a timing decision.
A simple example
You collect $24,000 in rent and pay $18,000 in interest, property tax, insurance and repairs. Your net rental income is $6,000.
In a 40% bracket that is about $2,400 of tax. The figures are round numbers for illustration, and this example ignores depreciation.
Does this fit my situation?
It fits if you
- Rent out a house, condo or basement suite for the long term
- Own the property personally, not through a company
Look further if you
- Run short-term or vacation rentals, which can bring GST/HST and different rules
- Buy to sell within a year, where the 365-day flipping rule can make the profit business income
- Are not a Canadian resident or own through a corporation
The honest catches
- Recapture is a surprise for many owners. Ask your accountant to estimate it before you sell.
- Records matter. Keep receipts and the purchase documents, which also set your cost base.
- This page is an overview. CCA and recapture calculations are not modelled here.
This is education, not tax, legal or investment advice. Talk to a licensed Canadian chartered professional accountant or certified financial planner before you act.
Estimate the tax on a sale
Enter the gain, your other income and your province to see the tax on the capital gain.
Open the Capital Gains Tax Calculator