selling rental house

QUESTION: My wife and I purchased a new home 5 years ago. We have been renting out our previous one since. We are thinking about selling the rental property. We will profit $70000 on the sale before paying off the $30000 mortgage. Will we be required to show capital gains or could we invest it in our new home? Would the capital gains be on the $70000 or the gain minus the mortgage on the house?

david ingram replies:

The capital gain is calculated as the difference between its value the day you moved out and the amount you sold it for less costs of the sale such as real estate commissions, fixing up expenses, and legal fees.

You do have the opportunity to claim that house tax free by filing form T2091, but you should have made an election under section 45(2) the first year you rented it. The problem with this:

It makes thhe house you are living in taxable for the same time period.  If it went up more than the $70,000, you will owe more than the tax on the first house. This 'can' be beneficial if you do not intend to sell your present home for another ten or twenty years.  The reson is because of the present value of the money.  i.e., it is usually better for your finances to pay $20,000 ten years from now then to pay $10,000 today.  It will ALWAYS be better if you do not need to pay the $20,000 for twenty years.

At the moment, I have never seen the CRA turn down a late section 45(2) election.

The following older question on income tax help will help explain section 45(2) to you. 


Please help.

I bought a Calgary condo in Oct 2003, and lived in the condo until March 2005, when I bought my present house.

The condo was rented from April 2005 to August 2006, and I sold it in Nov 2006, at a gain.

My question: Would I qualify for the Principal Residence exception and be exempted from Capital Gains tax for the condo sale?


Best Regards,

>> Hi, 
>> Last year, we rented out our condo in Vancouver.  The
>> plan then was to have the rent cover our mortgage
>> payments for the 12 months that we would be away.  A
>> short term solution.
>> Now, we are planning to be away from BC for a longer
>> period of time (approx. 2 years) and wish to sell the condo
>> in the middle of the year, as we are unable to rent the
>> condo for any longer due to strata council by laws.
>> 1) If we sell the condo when there has been a tenant living
>> in it for 12 months, will we pay capital gains?
>> 2) What are our best options to avoid paying this tax?
>> 3) If capital gains would be owed, for how long would we
>> have to make the unit our principal residence again before
>> we can sell it and not pay CGT?
>> Thank you,
david ingram replies:
If you filed a section 45(2) election with your first year's rental, you 
can rent the condo out for up to 4 years (plus 1 in the calculation) 
without incurring capital gains tax if you have not bought another 
residence that you are living in.

If you have bought and lived in another house, you have to choose one or the other as your tax free residence for the time you owned both.

 See Below:
  My question is: Canadian-specific

QUESTION: Dear Mr. Ingram,
I bought a house in the December of year 2000, lived there till the end of December 2000 (3 weeks) and started to rent it out on January 1, 2001. I filed the election 45(2) to claim the house as my primary residence for years 2001, 2002, 2003 and will do it for 2004.
I do not claim a depreciation for those years.
I want to sell the house now. Do I need to move in house first in order to avoid the payment of the capital gain taxes. For how long I have to stay there to be eligible for not paying the capital gain taxes on sold house if I need to move in.

Thank you in advance for you help,
david ingram replies:    First I am going to repeat your old question from last July and my answer.   My question is: Canadian-specific

QUESTION: Hi, David!
I would like to know is it possible to use the election under the section 45(2) again if the old house is sold and the new one is bought. Can it be used unlimited number of times by the condition that it is used for each house only once.

Thank you  
David Ingram replies:   Section 45(2) is intended to allow people to try something out.  This means that if you move to a rented condo for a couple of years and rent your house out, you can move back into the house without suffering a capital gains tax under section 45(2).   Since it was passed on June 17, 1972, (32 years ago now) I have never seen it used more than twice by one person.   Does not mean it has not been used more than twice in thirty years, it just means it is unlikely.   There is no numeric restriction but if you are moving in and out of houses, the CRA will treat you as a trader and tax you at full rates.   ---------------------------------------------------------- Now, to answer this question.  Section 45(2) is NOT something you can plan to use.  In other words, your living in the house for three weeks and renting it out and filing a section 45(2) election does NOT make it tax free if you bought the house to rent and not to live in as your personal principal residence.   Your question indicates to me that you are trying to beat the system and did not buy the first house to live in and unless you can show the tax office that you moved every stick of furniture in and really intended to live there, the CRA will not allow it to be sold tax free.   This year, a new policy of the CRA is that they wish form T2091 to be filed with every tax return where a personal house was sold during the year.   If it was your residence and you genuinely intended to live there and were transferred of suddenly got married or could not stand your neighbour or lost your driver's licence or suffered some other disaster that caused you to "HAVE TO" move suddenly, filing section 45(2) will make it tax free provided you did not also own another house that you did live in.   If you did own another house that you actually lived in, claiming the house you have filed the 45(2) election for as tax free, will MAKE THE HOUSE YOU ACTUALLY LIVED IN TAXABLE.   If you have a genuine 45(2) election, you do not need to move back in.  If it is not a genuine 45(2), moving back in will TRIGGER a tax bill as you move in.   You need a consultation with someone who knows the rules before you make a mistake. I am available in person or by phone at a fee of $350.00 minimum for an hour but not until November now.   As many know, I charge this for US / Canada tax an immigration advice as well.  I am not alone though.   If you have a tough US immigration question to ask or one that  I cannot deal with (remember I do Immigration AND tax) Joe grasmick is the place to g for a telephone consultation.  HIs fee is $295.00 per HALF hour and you can get hold of him at   I have sent two out of town people to him in the last month where it was obvious to me tha tthe people needed a lawyer as opposed to a consultant..   If you want a free answer for a couple of minutes, remember   Answers to this and other similar  questions can be obtained free on Air every Sunday morning.   Every Sunday at 9:00 AM on 600AM in Vancouver, Fred Snyder of Cartier Partners and I will be hosting an INFOMERCIAL but LIVE talk show called "ITS YOUR MONEY"   Those outside of the Lower Mainland will be able to listen on the internet at   Local phone calls to (604) 280-0600 - Long distance calls to 1-866-778-0600.   Old shows are archived at the site.