Selling a rental property can create two kinds of taxable income: a capital gain on the increase in value, and recapture of any capital cost allowance (CCA) you claimed on the building. This page works through both, step by step, with one example property. It is part of WealthNorth’s real estate tax guide; how CCA works while you own the property is covered in CCA on rental property, and the yearly T776 return in how to report rental income.
What gets taxed when you sell
| Tax result | When it happens | How it’s taxed |
|---|---|---|
| Capital gain | Proceeds are more than the adjusted cost base plus selling costs | 50% of the gain is added to your income |
| Recaptured CCA | If the proceeds from the property you sell are more than the undepreciated capital cost (UCC) of its class, the difference is recaptured CCA, added to your income in full rather than at the capital gains inclusion rate. | Added to income in full |
| Terminal loss | If no property is left in the class at the end of the year and part of the UCC hasn't been deducted, that remainder is a terminal loss, deductible from your rental income in the year of the sale. | Deducted from rental income |
A sale can produce a capital gain and recapture together, only one of them, or a terminal loss. The full rule from the CRA’s Guide T4036:
- If the proceeds from the property you sell are more than the undepreciated capital cost (UCC) of its class, the difference is recaptured CCA, added to your income in full rather than at the capital gains inclusion rate.
- The proceeds counted are the lower of the sale price (minus selling costs) and the property's original capital cost, so the recapture can't be more than the CCA claimed.
- Selling for more than the original cost is also a capital gain on the amount above that cost.
- If no property is left in the class at the end of the year and part of the UCC hasn't been deducted, that remainder is a terminal loss, deductible from your rental income in the year of the sale.
- Selling a building for less than its cost gives no capital loss; the loss can only be a terminal loss.
- A rental property acquired after 1971 with a capital cost of $50,000 or more goes in a separate class, so its recapture or terminal loss is worked out on that property alone.
Step 1: Work out the adjusted cost base
The CRA’s Guide T4037 describes the adjusted cost base (ACB) as the cost of a property plus any expenses to acquire it, such as commissions and legal fees.
| Item | Part of the ACB? |
|---|---|
| Purchase price | Yes |
| Legal fees on the purchase | Yes: the ACB includes expenses to acquire the property, such as legal fees |
| Land transfer tax | Yes. Guide T4036: “You cannot deduct land transfer taxes you paid when you bought your property. Add these amounts to the cost of the property.” |
| Capital expenses, such as a new roof or an addition | Yes: A rental expense that only restores the property to its original condition is usually a current expense, deducted in the year you pay it; one that improves the property beyond its original condition, extends its life, gives a lasting benefit or replaces a separate asset is usually a capital expense, added to a CCA class instead. |
| Current repairs and maintenance | No: they are deducted from rental income in the year you incur them |
| CCA claimed | No. Claiming CCA is optional: you can claim any amount from zero up to the year's maximum, and only what you claim reduces the balance left in the class for later years. |
Land and building are tracked separately
You cannot claim CCA on land. To calculate the building's capital cost, you have to split any fees that relate to buying the rental property between the land and the building. The building’s capital cost is what recapture is measured against, so the split matters at sale time; how the class balance works is covered in undepreciated capital cost.
Example: the adjusted cost base
All figures in this example are assumptions chosen for illustration. The purchase costs are split between land and building in the same proportion as the price .
| Item | Amount |
|---|---|
| Purchase price | $500,000 |
| Legal fees on the purchase | $2,000 |
| Land transfer tax paid | $8,000 |
| Total cost at purchase | $510,000 |
| Land share of the cost (assumed 30%) | $153,000 |
| Building share of the cost | $357,000 |
| New roof, added to the building’s cost | $20,000 |
| Building capital cost | $377,000 |
| Adjusted cost base, land and building | $530,000 |
Step 2: Work out the capital gain
Guide T4037 says to subtract the total of your property's ACB, and any outlays and expenses incurred to sell your property, from the proceeds of disposition. Outlays and expenses of selling include fixing-up expenses, finders' fees, commissions, brokers' fees, surveyors' fees, legal fees, transfer taxes and advertising costs. You cannot reduce your other income by claiming a deduction for these outlays and expenses. For a rental, Guide T4036 adds: “The deduction for legal fees also applies when calculating a recapture of CCA or a terminal loss.”
The example property sells for $800,000, with $32,000 in commission and $2,000 in legal fees .
| Item | Amount |
|---|---|
| Sale price | $800,000 |
| Selling costs (commission and legal fees) | $34,000 |
| Proceeds after selling costs | $766,000 |
| Adjusted cost base | $530,000 |
| Capital gain | $236,000 |
| Taxable capital gain (50% inclusion) | $118,000 |
The 2024 proposal to raise the inclusion rate to two-thirds on gains above $250,000 was cancelled in March 2025, so the same 50% rate applies to the whole gain.
Step 3: Work out recaptured CCA
Suppose CCA of $60,000 was claimed on the building over the years, and an assumed 60% of the net proceeds is allocated to the building . The proceeds counted are the lower of the sale price (minus selling costs) and the property's original capital cost, so the recapture can't be more than the CCA claimed.
| Item | Amount |
|---|---|
| Building capital cost | $377,000 |
| CCA claimed over the years | $60,000 |
| Undepreciated capital cost (UCC) at the sale | $317,000 |
| Building’s share of the net proceeds (60%) | $459,600 |
| Proceeds counted: the lesser of the building’s proceeds and its capital cost | $377,000 |
| Recaptured CCA | $60,000 |
Here the building’s share of the proceeds is more than its capital cost, so the recapture equals all the CCA claimed, and the building’s increase in value above its cost is part of the capital gain worked out in step 2. Recapture is reported on line 9947 of Form T776 (a terminal loss on line 9948). For co-owners, Guide T4036 says: “If you are a co-owner, enter your share of the amount.”
Step 4: The tax on the sale
The taxable capital gain and the recapture are both added to your income for the year of the sale and taxed at your marginal rates, so the tax depends on your other income and province. For the example, assume the seller lives in Ontario and has $100,000 of employment income in the year of the sale .
| Item | Amount |
|---|---|
| Taxable capital gain | $118,000 |
| Recaptured CCA | $60,000 |
| Added to income | $178,000 |
| Federal and Ontario income tax on $100,000 of employment income (2026 rates) | $20,024 |
| Federal and Ontario income tax with the sale added | $102,317 |
| Extra income tax from the sale | $82,293 |
The tax figures come from the site’s tax model, which includes the basic personal amounts, the Ontario surtax and the Ontario Health Premium. To try your own numbers, use the capital gains tax calculator or the marginal tax rate calculator.
If you lived in the property
The principal residence exemption can cover the gain for years the property was your home. 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.
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 calculation when a property was a home for part of the time is in the principal residence exemption guide and converting your home to a rental.
Selling at a loss
Selling a building for less than its cost gives no capital loss; the loss can only be a terminal loss. Unlike CCA, a terminal loss can create a rental loss. A capital loss on the sale is applied as follows:
- An allowable capital loss is applied first against your taxable capital gains of the same year.
- What is left (a net capital loss) can reduce taxable capital gains in any of the three years before, or in any future year.
- A net capital loss usually can only be applied against taxable capital gains, not other income.
- To carry a loss back or forward, complete Schedule 3 and attach it to your return, so the CRA's records show the loss.
- To apply a loss to an earlier year, use Form T1A, Request for Loss Carryback; don't file an amended return for that year.
Options that change the tax on a sale
| Option | How it works |
|---|---|
| Keep records of the ACB | Every cost that belongs in the ACB lowers the gain. Keep records for six years from the end of the last tax year they relate to. |
| Timing the sale | The gain and recapture are taxed at the marginal rates for the year of the sale, so the tax depends on your other income that year |
| Capital gains reserve | If the buyer pays over several years, a reserve can spread the gain over up to 5 years; you claim it on Form T2017, Summary of Reserves on Dispositions of Capital Property |
| Capital losses | An allowable capital loss is applied first against your taxable capital gains of the same year. |
| Transfer to a spouse during your life | If you give the property to your spouse or partner, the attribution rules apply: When your spouse or partner sells that property, you usually report the capital gain or loss, if at the time of the sale you are resident in Canada and still together. |
| Passing the property to a spouse at death | 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. |
| Postponing recapture | Recapture can be postponed in some cases, such as replacing the property with a similar one, an expropriation, or a transfer to a corporation, a partnership or your child. |
Forms to file
| Form | What it’s for |
|---|---|
| Schedule 3, Capital Gains or Losses | Guide T4036: “List the dispositions of all your rental properties on Schedule 3, Capital Gains or Losses.” |
| Form T776, Statement of Real Estate Rentals | Rental income for the year of the sale, recaptured CCA (line 9947) or a terminal loss (line 9948) |
| Form T2091(IND) | You designate the home when you report the sale, on Schedule 3 and Form T2091(IND). |
| Form T2017, Summary of Reserves on Dispositions of Capital Property | Claiming a capital gains reserve |
Inherited rental property
Capital property (such as real estate, investments, or personal belongings) owned by the person who died is considered to be disposed of by that person immediately before their death at fair market value, and may result in a capital gain or a capital loss which must be reported on Schedule 3 of the final return. Generally, when you inherit property, the property's cost to you is equal to the deemed proceeds of disposition for the deceased person. Usually, this amount is the FMV of the property right before the person's death. The exception for a surviving spouse is the rollover in the table above; the heir’s side is covered in tax on an inheritance.
Related pages
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: Capital Gains – 2025
- Canada Revenue Agency: Rental Income
- Canada Revenue Agency: Payroll Deductions Formulas - 123rd Edition Effective July 1, 2026
- Canada Revenue Agency: Taxable capital gains on property, investments, and belongings
- Canada Revenue Agency: Principal residence
- Canada Revenue Agency: Income Tax Folio S1-F3-C2, Principal Residence
- Canada Revenue Agency: Keeping Records
- Department of Finance Canada: Government of Canada announces deferral in implementation of change to capital gains…
- Government of Canada: Archived - Chapter 8: Tax Fairness for Every Generation | Budget 2024
- Justice Laws (Canada): Income Tax Act
- Justice Laws (Canada): Income Tax Act
- 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