You Rented Out Your Old Home. The Tax Nobody Mentions

Published 12 November 2026 · By Jatin Dua, Broker of Record, RE/MAX Quantum Realty

You moved out of your condo, kept it, and rented it to a tenant. Sensible decision. What nobody told you is that for tax purposes, on the day the use changed, you are treated as having sold it — and the clock on your principal residence exemption started running out.

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Most people discover this years later, when they finally sell and the accountant asks when it became a rental. Here is how it works and what you could have done about it.

The deemed disposition

When you completely convert a principal residence to income-producing use, the Income Tax Act treats the property — land and building — as sold at fair market value and immediately reacquired at that same value.

Any gain arising at that moment may be reduced or eliminated by the principal residence exemption, since up to that point it was your home. So the change itself often produces no tax.

The consequence comes later. Your cost base resets to the fair market value on the date of the change, and from that day forward the property is a rental. When you eventually sell, the gain from the change-of-use date onward is generally taxable, because the property was no longer your principal residence for those years.

A partial change of use — renting out part of the home — can trigger a similar deemed disposition of the converted portion. The CRA does not apply this to minor, ancillary uses where there has been no structural change and no capital cost allowance claimed.

The election that defers it

There is a provision that changes the outcome: the subsection 45(2) election.

You can elect that the change in use is treated as not having occurred. The deemed disposition does not happen, and the gain is not recognised at that point.

How it is made: by a signed letter filed with your tax return for the year of the change. There is no prescribed form. It is a letter — which is precisely why so many people never make it. Nobody mentions it, there is no box to tick, and the deadline passes silently.

What the election buys you: four years

While a subsection 45(2) election is in force, the property can be treated as your principal residence for up to four tax years, even though nobody is ordinarily living in it.

Conditions:

You must be resident in Canada, or deemed resident, during those years.
You cannot designate a different property as your principal residence for those same years.

That second condition is the catch most people miss. If you moved out of the condo and bought a house you now live in, you cannot have both as your principal residence for the same years. The election shelters the condo and exposes the house for those years. Which property to shelter is an arithmetic question about where the gains are, and it is one for an accountant.

Since March 19, 2019, the election has also been available for a partial change in use.

The extension nobody knows about

Section 54.1 can extend the four-year limit where the change of use happened because of an employment relocation. Broadly, the conditions are that your or your spouse’s employment was relocated, the new employer is unrelated to you, the home is at least 40 kilometres farther from the new workplace than the new residence is, and you resume living in the home within the required period — or you die during that employment.

If you were posted elsewhere for work and rented out your home, this is worth raising with your accountant explicitly. It is a real extension and it is routinely overlooked.

The mistake that cancels the whole thing

While the election is in force you must still report the rental income. But you should not claim capital cost allowance — depreciation on the building.

If you claim CCA, the election is considered rescinded on the first day of the year in which that claim is made. The deemed disposition takes effect and the deferral is lost.

This is a genuinely cruel trap, because claiming CCA looks like straightforward good tax planning. It reduces this year’s rental income. And it silently destroys a much more valuable shelter.

So if you have made the election: report the rent, deduct your operating expenses, mortgage interest, property tax, insurance and repairs — and leave CCA alone.

What to do depending on where you are

If you are about to rent out your home

Talk to an accountant before the tenant moves in. Get a documented opinion of fair market value as at the change-of-use date — you will need it either way, and reconstructing it four years later is far harder. Then decide, with advice, whether to make the election.

If you rented it out and made no election

You likely had a deemed disposition at the time. Get the historical fair market value established as best you can and find out where you actually stand. This may be less bad than it sounds, because the principal residence exemption may have covered the gain up to that date. What matters now is knowing your correct cost base.

If you have claimed CCA

Raise it with your accountant specifically. If an election was in force, it may have been rescinded, and you need to know from which year.

If you are selling now

Expect to report the sale and to apportion the gain between the exempt and taxable periods. Note separately that since 2016 the sale of a principal residence must be reported on your return even where the gain is fully exempt — failing to report can affect the exemption.

The short version

Changing your home into a rental is a deemed sale at fair market value. A subsection 45(2) election — a signed letter with that year’s return — defers it and can keep the property as your principal residence for up to four more years, but you cannot designate another property for those years, and claiming CCA kills the election. Get an accountant involved before the tenant moves in, not when you sell.

I am a real estate broker, not an accountant, and this is general information about how the rules work rather than tax advice. Change-of-use is one of the areas where a conversation with an accountant genuinely pays for itself many times over.

Sources

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