The principal residence exemption (PRE) is what lets a homeowner sell the home they live in without paying tax on the profit. This guide covers which homes qualify, the formula that decides how much of a gain is exempt, the one-home-per-family limit, what happens when a home becomes a rental (or a rental becomes your home), and how to report the sale. It is part of the real estate tax hub.
What Is the Principal Residence Exemption?
The gain on a home is tax-free for each year you designate it as your principal residence: you or your family must have ordinarily lived in it that year, a family can designate only one home a year, and you report the sale on Schedule 3 and Form T2091; the exempt share is the years designated (while resident in Canada), plus one if you were resident in the year you bought it, divided by the years owned.Without the exemption, the gain on a home is a capital gain like any other: 50% of it (the inclusion rate) is added to your taxable income. The capital gains tax calculator shows what that costs by province.
What Qualifies as a Principal Residence
- You, your spouse or common-law partner, a former spouse or partner, or your child ordinarily lived in the home in the year (even a short stay can count).
- Only one home per family unit can be designated for a year.
The CRA lists these types of housing unit: a house, a cottage, a condominium, an apartment in an apartment building, an apartment in a duplex, and a trailer, mobile home or houseboat. A leasehold interest in a housing unit, or a share of a co-operative housing corporation bought only to get the right to live in one of its units, can also qualify, and you can own the property alone or jointly with another person (CRA, principal residence).
The One-Plus Formula
The exempt part of the gain is the number of years designated (years you were resident in Canada), plus one if you were resident in Canada in the year you bought it, divided by the number of years you owned it.The extra year exists for the year you sell one home and buy another: the CRA calls it the “plus 1” rule, which lets both homes be treated as eligible for that year even though only one can be designated for it. You get the extra year only if you were resident in Canada in the year you bought the home.
The formula matters when a home wasn’t designated for every year, for example a cottage owned alongside a city home. In the example below, the inputs are made up and the rates come from data.
A family owned a cottage for 16 tax years and designated it as their principal residence for 12 of them (the city home was designated for the other 4). The gain on the cottage is $400,000.
| Step | Calculation | Result |
|---|---|---|
| Years counted | 12 designated + 1 | 13 |
| Exempt share | 13 รท 16 years owned | 81.25% |
| Exempt gain | $400,000 ร 81.25% | $325,000 |
| Capital gain left | $400,000 โ $325,000 | $75,000 |
| Taxable capital gain | $75,000 ร 50% inclusion rate | $37,500 |
The taxable capital gain is added to income and taxed at your marginal rate, which the capital gains tax calculator works out with each province’s brackets.
One Property Per Family Unit Per Year
Only one home a year can be designated for your whole family, and the CRA defines who your family is. Its rules, from the line 12700 guidance:
- For 1982 and later years, you can designate only one home as your family's principal residence for each year.
- Your family includes a person who was your spouse or common-law partner throughout the year, unless you were separated for the entire year under a court order or a written agreement.
- It includes your children, other than a child who had a spouse or common-law partner during the year or who was 18 or older during the year.
- If you had no spouse or common-law partner and weren't 18 or older during the year, it also includes your mother and father, and your brothers and sisters who had no spouse or partner and weren't 18 or older.
- For 1982 to 1992 only a spouse counted, not a common-law partner, so common-law partners could designate different homes for those years.
- For years before 1982, more than one home per family could be designated, so spouses could designate different homes.
A city home and a cottage. When a family owns two homes, the designation is made when one of them is sold, and the formula above decides how much of each gain is exempt. Each year designated to a home shelters that home’s gain divided by its years of ownership, so the split that shelters the most depends on each home’s gain and how long it was owned. The cottage and vacation property tax guide works through the choice.
Years before 1982. A special rule applies when family members designated more than one home for those years; it is set out in Income Tax Folio S1-F3-C2.
Partial Exemption: Part of the Home Used to Earn Income
Renting a room or a suite while you live in the home is covered by the CRA’s partial-rental rule. Renting out part of your home keeps the whole home a principal residence only if the rental is ancillary to your use of it as a home, you make no structural change to it, and you claim no capital cost allowance on it; otherwise the rented part is treated as changed to a rental, and only the home part of the gain is exempt when you sell. The partial rental guide has every condition and shows how the split works when you sell. If you claimed capital cost allowance on the rented part of the building: When you sell a rental building for more than its undepreciated capital cost (UCC), the difference, counting the sale price only up to the building's original cost, is recaptured CCA and added to your income in full; a sale above the original cost is also a capital gain, and if no property is left in the class and some UCC remains, that remainder is a terminal loss you deduct.
Change-in-Use Rules
Personal to rental
Turning your home into a rental is a deemed sale at fair market value, but you can elect under subsection 45(2) of the Income Tax Act not to be treated as having changed its use: you then can't claim capital cost allowance on it, you still report the net rental income, and you can keep designating it as your principal residence for up to four years (longer for some work relocations) as long as you designate no other home and stay resident in Canada. The guide to converting your home to a rental has the conditions and covers the decision step by step.
Rental to personal
Moving into a property you have rented out is a deemed sale at fair market value, but you can elect under subsection 45(3) of the Income Tax Act to postpone reporting it until you actually sell, and designate the property as your principal residence for up to four years before you move in; the election isn't available if CCA was claimed on the property for any year after 1984, and it covers only the capital gain. The converting guide has the filing deadline and the other conditions.
The Residential Property Flipping Rule
Since January 1, 2023, the profit on a home in Canada you owned for less than 365 consecutive days is business income (fully taxed, with no principal residence exemption) unless the sale was due to a listed life event: death, a household change, a relationship breakdown, a threat to safety, serious illness or disability, job loss, a relocation for work or school, insolvency, or the home's destruction or expropriation. The flipping rule guide has the conditions and exceptions and works through examples. When the flipping rule doesn’t apply, the CRA says whether the profit on a sale is business income or a capital gain depends on the specific details of the situation.
Foreign Property Owned by Canadians
The CRA’s folio says a property outside Canada can, depending on the facts, qualify as a principal residence, and a resident of Canada who owns a qualifying property outside Canada can designate it for the year. The same one-home-per-family and residence conditions apply. Tax charged on the sale by the other country is a separate question; the foreign tax credit guide covers how it is credited.
How to Claim the PRE
You designate the home when you report the sale, on Schedule 3 and Form T2091(IND).- Schedule 3. Report the sale and designate the property in Part 2 of Schedule 3, even when the whole gain is exempt. Effective 2016 and later tax years, the CRA allows the exemption only if you report the sale and the designation on your return.
- Form T2091(IND). Complete it as well. Only page 1 is needed if the home was your principal residence for all the years you owned it, or for all years except one; otherwise the form works out the part of the gain to report.
- A rented part. If part of the home was used to earn income and the partial-rental conditions weren’t met, report the gain on that part on line 13800 of Schedule 3.
If you forgot to designate. The CRA asks you to request an amendment to the return for the year of the sale. It can accept a late designation in certain circumstances, with a penalty of the lesser of $8,000 and $100 for each complete month from the original due date to the date of the request (CRA).
A loss on your home. Your home is personal-use property, so if you have a loss when you sell it, or are considered to have sold it, you can't claim the loss.
Planning Points
- Two homes: only one home can be designated for a given year, so a year designated to the first home sold can’t later go to the other. Keeping a written record of the years designated helps when the second home is sold.
- Renting the home: a rental period changes how much of the gain is exempt; the election above, and whether CCA is claimed, decide the outcome. See the converting guide.
- Death: the legal representative designates the home on Form T1255. Capital property, including a rental property or company shares, that passes at death to a spouse or common-law partner resident in Canada, or to a qualifying spousal trust, is transferred at its tax cost (adjusted cost base, or for a building the lower of its capital cost and undepreciated cost), so no gain or recapture is taxed until the spouse sells, unless the executor elects out.
Land Size Limits
Land over one-half hectare is covered only if you show it was necessary for your use and enjoyment of the home.The CRA puts the usual limit at half of a hectare (1.24 acres). Its example of needing more: a municipality’s minimum lot size, in a year you owned the property, that was larger than that. The folio also gives an example of extra land whose only feasible use was to add to the enjoyment of the home, and finds it was not necessary for the use and enjoyment of the house as a residence.
Renovations and the Adjusted Cost Base
| Type of expense | Added to the adjusted cost base? |
|---|---|
| Capital expenditures, such as additions and improvements | Yes |
| Current expenses, such as maintenance and repairs | No |
The CRA’s capital gains guide sets out this split. A higher adjusted cost base means a smaller gain, which matters when only part of the gain is exempt, for example after years as a rental.
Non-residents
The one-plus formula counts only the years you were resident in Canada, so years you weren’t resident don’t count toward the exempt share. The CRA’s folio notes that even when a non-resident’s home in Canada qualifies as a principal residence, this residence requirement typically prevents the exemption from eliminating the gain. If you weren’t a resident of Canada for the whole time you owned the home, the CRA asks you to contact it, since non-residence may reduce or eliminate the exemption. The non-resident property tax guide covers selling property in Canada as a non-resident.
Related Reading
Sources
The figures and rules on this page come from these sources, last checked against them between September 23, 2026 and October 1, 2026. How we check facts.
- Canada Revenue Agency: Principal residence
- Canada Revenue Agency: Reporting the sale of your principal residence for individuals (other than trusts)
- Canada Revenue Agency: Income Tax Folio S1-F3-C2, Principal Residence
- Canada Revenue Agency: Rental Income
- Canada Revenue Agency: Residential Property Flipping Rule
- Canada Revenue Agency: Capital Gains โ 2025
- Justice Laws (Canada): Income Tax Act
- Justice Laws (Canada): Income Tax Act
- Prime Minister of Canada: Prime Minister Carney cancels proposed capital gains tax increase