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Purchase and Sale of Rental Property
Rental Property Purchase on the Tax Return
Allocation of Rental Property Cost Between Land and Building
Rental Property Capital Cost Allowance and Deductible Expenses
Sale of Rental Property on the Tax Return
Capital Gain Inclusion Rate Sale of Rental Property
Residential Rental Property Held For Less Than 12 Months
Owning Rental Property in Another Country
Buying a Replacement Rental Property
Canada Revenue Agency (CRA) Resources
Rental Property Purchase on the Tax Return
The capital cost of your rental property is recorded in your personal tax return on form T776 Statement of Real Estate Rentals. The cost of the building is recorded in the capital cost allowance schedule on this form, in the additions area. The cost of land purchased during the year is recorded at the bottom of form T776 on line 9923. The cost must be recorded in Canadian $.
Allocation of Rental Property Cost Between Land and Building
When a rental property is purchased, the split of cost between land and building should be agreed upon by the vendor and purchaser. The vendor may want a higher portion of the selling price to be allocated to land, in order to avoid recapture of capital cost allowance, if any has been claimed. The purchaser may want a higher portion of the purchase price to be allocated to building, in order to claim more capital cost allowance. However, a higher portion allocated to the building for the buyer will often result in recapture of capital cost allowance when the property is ultimately sold.
Rental Property Capital Cost Allowance and Deductible Expenses
For more information on capital cost allowance (CCA), see our article on Rental Property Issues and Expenses.
For information on the deductibility of interest expense on funds borrowed to purchase rental property, see our article Interest Expense on Money Borrowed to Purchase Real Estate.
Sale of Rental Property on the Tax Return
When a rental property is sold, the amount that is the lower of cost or proceeds from the sale of the building is entered in the capital cost allowance schedule on the T776. Any negative difference between this amount and the undepreciated capital cost (UCC) will be brought into income as recapture. This amount will be nil if no capital cost allowance has ever been claimed for the building, and proceeds are greater than cost. If there is a balance remaining in the CCA class after all assets in the class have been sold, there is a terminal loss which can be used as a deduction against business or property income. The proceeds from the sale of the land is entered on line 9924 of the T776. Any capital gain or loss (proceeds less cost) is recorded on Schedule 3. Generally, allowable capital losses can only be used to reduce or eliminate taxable capital gains.
Capital Gain Inclusion Rate Sale of Rental Property
After June 24, 2024, the inclusion rate for the capital gain on rental property depends on the form of ownership.
 | If owned by a corporation, the capital gains inclusion rate will be 66 2/3% for the entire capital gain. |
| If owned by an individual, then the first $250,000 of capital gains in the year will be included in income at a 50% inclusion rate, with a 66 2/3% inclusion rate for the amount in excess of $250,000. |
| If owned jointly by 2 or more individuals, the capital gain will be split among the owners according to their ownership percentage. Each owner will have a 50% rate for the first $250,000 of capital gains in the year. |
Residential Rental Property Held For Less Than 12 Months
If the rental property is a residential property held for less than 12 months, the Residential Property Flipping Rule causes the gain to be fully taxable as business income, not capital gains. This does not only apply to rental properties, but to personal use real estate as well, including a principal residence (with some exceptions).
In BC, the BC Home Flipping Tax applies to the sale of residential properties, properties with a housing unit, or the right to acquire those properties, if sold within 2 years of purchase, and sold on or after January 1, 2025.
Owning Rental Property in Another Country
If your rental property is in another country and the cost exceeds $100,000 Canadian, including the cost of any capital improvements made after the original purchase, then you must complete form T1135, Foreign Income Verification Statement. There are penalties for not completing this form.
Buying a Replacement Rental Property
Income Tax Act s. 13(4), 44(1)
Under the replacement property rules, a taxpayer may be able to elect to defer the recognition of capital gains or recapture of capital cost allowance (CCA), when a replacement property is purchased within specified time limits. This will generally only apply to an involuntary disposition of the rental property. An involuntary disposition could include when proceeds of disposition are received due to expropriation, compensation for stolen property, or insurance re property destroyed.
The replacement property rules apply to voluntary dispositions when the property was, immediately prior to the disposition, a former business property of the taxpayer.
See Canada Revenue Agency (CRA) Income Tax Folio S3-F3-C1, Replacement Property: "Former business property" and "Rental property".
Before purchasing property for rental purposes, talk to a professional accounting/tax advisor, and know the tax rules!
Investing in stocks is MUCH easier than being a landlord, and the investments can be sold a bit at a time, probably staying under the $250,000 re the capital gains inclusion rate!
TaxTips.ca Resources
Change in Use of Real Property - GST/HST and Income Tax Implications
Denial of Expenses for Short-Term Rentals
Investing - Stocks, Bonds and Other Investments
Canada Revenue Agency (CRA) Resources
Rental Income Tax Guide (T4036) - goes into detail about deductible expenses, capital cost allowance, deemed dispositions, splitting of expenses between personal areas and rental areas, and most issues regarding property rental.
Income Tax Folio S3-F3-C1, Replacement Property
Revised: September 20, 2024