How much tax do I pay when I sell a rental property?

Tax on a rental property sale has two components: (1) capital gains tax on the appreciation since purchase, and (2) CCA recapture if you claimed depreciation. Capital gains are included at 50% (first $250,000/year) or 66.67% (above $250,000) and taxed at your marginal rate. CCA recapture is fully included in income at your marginal rate. Together, these can total 30%–50% of your net profit depending on your tax bracket.

How do I avoid capital gains tax on a rental property in Canada?

There is no simple way to eliminate capital gains tax on a rental property. Strategies to reduce it include: tracking every capital improvement to maximize your ACB, using the principal residence exemption for years you lived in the property, selling in a lower-income year to reduce your marginal rate, and using capital losses from other investments to offset the gain. There is no equivalent of a 1031 exchange in Canada.

What is an adjusted cost base (ACB) and why does it matter for rental property?

The ACB is the tax cost of your property — the purchase price plus every capital improvement you made. A higher ACB means a smaller capital gain and less tax on sale. Many landlords underreport their ACB because they did not keep records of improvements. Every invoice for a capital improvement (new roof, addition, new appliances) should be saved for the life of the property plus six years after sale.

Do I pay tax on a rental property my parents left me?

On a death, the property is deemed to be sold at fair market value. Your parents' estate pays any resulting capital gains and recapture in the final tax return. When you inherit the property, your ACB becomes the fair market value at the date of death — so future gains are measured from that point, not from your parents' original purchase price.

What if I sell at a loss?

A capital loss on a rental property — where you sell for less than your ACB — can offset capital gains from other sources in the same year. Any unused capital loss becomes an allowable capital loss that can be carried back 3 years or forward indefinitely. Note: if there is recaptured CCA, that still applies regardless of a capital loss — the building recapture and the land capital gain/loss are calculated separately.

When do I need to file after selling a rental property?

Capital gains from a rental property sale must be reported on Schedule 3 of your T1 return for the year in which the sale closed. You do not file a separate form — it flows through your regular income tax return. If the sale closes in 2025, report it by April 30, 2026 (or June 15, 2026 if you have other self-employment income, but any tax owing is still due April 30).

Selling a Rental Property in Canada: Tax Guide

Short Answer

Selling a rental property triggers capital gains on appreciation and recapture of CCA previously claimed — both taxed in the year of sale. The combined tax impact can be significant, which is why pre-sale planning (maximizing ACB, timing, using exemptions) is worth understanding well before you list.

The Two Tax Events on Sale

Tax event	What it is	Tax rate
Capital gain	Sale price minus ACB minus selling costs	50%–66.67% of gain included in income at marginal rate
CCA recapture	UCC recovered when sale price > undepreciated capital cost	100% included in income at marginal rate

These are calculated separately and can occur in different amounts. A property can have both a capital gain and CCA recapture, just CCA recapture, or just a capital gain.

Step-by-Step Sale Tax Calculation

Step 1: Calculate Adjusted Cost Base

ACB component	Your property
Purchase price	$________
Legal fees and land transfer tax	$________
Capital improvements	$________
Other acquisition costs	$________
Total ACB	$________

Step 2: Calculate Capital Gain

Item	Amount
Sale price	$________
Less: selling costs (realtor commission, legal fees, mortgage penalty)	($________)
= Net proceeds	$________
Less: ACB	($________)
= Capital gain	$________

Step 3: Apply Inclusion Rate (2024 Rules)

Gain portion	Inclusion rate	Taxable amount
First $250,000	50%	$________
Above $250,000	66.67%	$________
Total included in income		$________

Step 4: Calculate CCA Recapture (if CCA was claimed)

Item	Amount
UCC at start of year of sale	$________
Any CCA claimed in year of sale	($________)
Adjusted UCC	$________
Proceeds allocated to building portion	$________
Recapture (proceeds in excess of UCC)	$________

CCA recapture is fully included in income — no partial inclusion rate.

Example: Full Calculation

Property details
Purchase price	$400,000
Capital improvements	$50,000
ACB	$450,000
CCA claimed (Class 1, over 10 years)	$36,000
UCC at sale	$284,000 (of $320,000 building value at purchase)
Sale price	$720,000
Selling costs	$28,000
Net proceeds	$692,000

Tax event	Calculation	Amount taxable
Capital gain	$692,000 − $450,000	$242,000
Inclusion rate (first $250K at 50%)	$242,000 × 50%	$121,000 included
Building proceeds allocated	$580,000 (assume $140,000 for land)	—
CCA recapture	$580,000 − $284,000	$296,000 fully included
Total added to income		$417,000
Tax at 43.41% (sample rate)	$417,000 × 43.41%	~$181,000

Selling Costs That Reduce Your Capital Gain

Selling cost	Reduce capital gain?
Real estate commissions	Yes
Legal fees for the sale	Yes
Mortgage prepayment penalty	Yes
Staging and repairs to get property ready for sale (capital in nature)	Yes, if capital in nature
HST/GST on commissions	Yes
Moving costs	No
Landscaping or cosmetic repairs before sale	Only if capital — not if expensed as maintenance

Using the Principal Residence Exemption

If you lived in the property for some years as a principal residence:

Formula	(1 + Designated PRE years) ÷ Total years owned × Capital gain = PRE-sheltered amount

CCA recapture cannot be sheltered by the PRE — only the capital gain.

Property Held in Joint Names

Each co-owner reports their proportionate share of the capital gain and recapture on their own return. If you and a spouse each own 50%, you each report 50% of the gain and 50% of the recapture independently.

Filing Requirements

Form	Purpose
Schedule 3	Report capital gain on the sale
T776 (final year)	Report rental income, CCA recapture, and terminal CCA adjustment
T1 General	Capital gain and recapture included in total income

Bottom Line

Selling a rental property is one of the largest tax events most Canadians will ever face. The capital gain and CCA recapture together can mean a tax bill of $100,000 or more on a property held for 10+ years. Tracking your ACB from day one, understanding the CCA recapture implications, and planning the sale year carefully are the three most important things a rental property owner can do to manage this tax event.