How to Calculate Tax Payable on the Sale of Your Rental Properties?

Hi fellow Canadian Real Estate Investors,

It was my birthday weekend last week.

facebook_1470672080045Erwin arranged a surprised celebration party on Sunday with my best friends.

He knows that I’m a geek so we once again went to an escape room. This time we manage to escape in less than 35 minutes and that was the fastest time I had ever done!

We even made the best escape time for the week! Woo-hooh!

Now onto this week’s topic.

The Tax Man is often the most ignored partner in our business.

He usually gets a big chunk of our return.

For those of you who are considering selling their principal residence, you can be reassured that you likely won’t have to pay any tax on your home provided that you meet certain conditions.

For those of you who are considering selling one of their investment properties, the tax implication can be a bit more complicated.

There are two steams of income you would need to pay tax on: (1) capital gain and (2) recapture.

Capital gain

This is an easy one. Let’s use an example to illustrate.

Say you purchase a property for $250,000, and you sell it for $350,000 and assuming the property is buy and hold.

Capital gain = $350,000 – $250,000 = $100,000.

In Canada, only 50% of capital gain is taxable, hence 50% of $100,000 is taxable = $50,000.

If you own the property in your own personal name, this $50,000 is added on top of your other income and is subject to the marginal tax rate for the respective tax brackets you are in.

For simplicity’s sake, we use the HIGHEST marginal tax rate in Ontario in our calculation – 53.53%, round it down to 50%.

Hence tax liability is roughly $50,000 x 50% = $25,000.

Keep in mind that if you make less than $220,000 personally BEFORE you add in this $50,000, you will be subject to lower tax.

$25,000 is MAXIMUM you would have to pay on the capital gain.

If you own the property in your corporation, the numbers would pretty much the same. 50% is taxable but the taxable portion is considered passive income.

Passive income is taxed at slightly over 50%.   Hence, you do the same calculation as above. Take $100,000 x ½ (50% taxable) x 50% (rough tax rate on passive income) = $25,000.

Next time when you are trying to estimate the amount of taxes you would owe when you sell a property, simply take the gain and multiply it by 25%. This will give you a really good idea of how much you would have to pay.


As a taxpayer, you are allowed to claim the wear and tear on the property to defer your rental income.

The wear and tear is called capital cost allowance.

Use the same example as above, you purchased a property for $250,000.

Assume that 90% of the value belongs to the building and 10% of the value belongs to the land, capital cost of the building is therefore 90% x $250,000 = $225,000.

You can then claim $225,000 x 4% against your net rental income every year to defer the tax. The amount of claim is capped by the amount of net rental income you make from your portfolio.

In a previous blog posts that I wrote last year, I discussed whether you should use capital cost allowance to defer your rental income before. Feel free to check this out.

What’s the catch then?

You will have to take all the deductions you claimed throughout the years into income the year you sell your rental property!

For those of you who are unfamiliar with the concept, concept of capital cost allowance is similar to that of RRSP. You deduct the contribution you make against your income but you will have to report them in your income the year you take it out.

Say year 1 you had $5,000 net income after deducting all the qualified expenses against the rental income. You can take the lower of:

  • $225,000 x 4% x ½ (first year only ½ is deductible) = $4,500
  • $5,000

In this case, you can choose to deduct $4,500. But this also means that the year you sell it you will have to take this $4,500 into your income.

Now year 2 you had the same net income of $5,000. You can again take the lower of:

  • You can only take 4% on the undepreciated amount ($225,000 – $4,500) x 4% = $8,820
  • $5,000

In year 2, you will take $5,000 of capital cost allowance.

Say year 3, you decide to sell and it was sold for $350,000.

On top of the capital gain tax that you would have to pay, you are also required to take all the capital cost allowance into income.

In our example, you’ve taken $4,500 in year 1 and $5,000 in year 2, total of $9,500.

You will have to take $9,500 into income.

Similar to the calculation of capital gain tax above, we use the highest marginal tax rate of 50% to estimate the tax.

Therefore, tax payable on recapture is 50% x $9,500 = $4,750.

Total tax liability = capital gain tax + recapture tax = $25,000 + $4,750 = $29,750.

Are there ways to reduce these tax liability?


Recapture tax can be reduced by using capital cost allowance of another property against the property being sold.

If you don’t have a second one, you can consider buying another property in the same calendar year.

Capital gain taxes can be reduced by any capital assets that you own that already have unrealized capital losses, such as, loss on any stock or mutual funds in any unregistered accounts.

Until next time, happy Canadian Real Estate Investing and enjoy the heat.

Cherry Chan, CPA, CA

Your real estate accountant

39 replies
  1. Syed Kamal
    Syed Kamal says:

    In the example you used the capital gain was $100,000. What if I developed basement, made repairs to drainage system, bought furniture and appliances for the rental home etc etc. Would these costs not be expenses deductible against capital gain. What kind I be required to have at hand.

    • Cherry
      Cherry says:

      If you made repairs to drainage system and they were truly repairs, expenses should be considered a write off against rental income. On the other hand, if the expenses were incurred to improve the property, these expenses would be added to the cost of the building, and you can claim them against the future sale price (and also claim capital cost allowance on these expenses).

      For all the expenses, you are required to keep all the receipts incurred.

  2. Rakesh
    Rakesh says:

    Some one buy home plot for 2,00,000 now selling it 9,00,000 profit is 7,00,000. Now how much he is liable to pay as tax to BC govt.

    • Cherry
      Cherry says:

      Rakesh, it’s a complicated question. If you buy the house with the intention to flip, you are liable for tax on $700K. Depending on the ownership structure, you can pay as low as 15% and as high as 50%.

      If the intention is to buy the house for long term investment and earning rental income, you can use the capital gain calculation done in this blog post for your tax estimate.

      If you purchased the home and have lived there as your primary residence, your tax balance can be nil.

      So depending on your situation and make sure you consult with a professional accountant for your particular situation for the proper advice.

  3. Colleen Smith
    Colleen Smith says:

    You state that recapture tax can be avoided by using the UCC of another property or by buying another property in the same year. This deals with the concept of pooling assets in one class. However, I’ve been told by a tax person that rental properties in excess of 50k have to be put in separate classes and that when a property is sold, tax has to be paid on any recapture, even though the taxpayer owns other properties with UCC balances or replaces the asset in the same calendar year. What is the correct answer?

    • Cherry
      Cherry says:

      Hi Colleen, rental income is viewed on a portfolio basis and hence CCA taken on one property can be used to offset against rental income incurred on another property. Recapture is viewed as rental income and CCA on a new property can then be used to reduce the rental income (partly created by recapture) and provide further deferral.

      Hopefully this helps.

    • Cherry
      Cherry says:

      Generally speaking residential rental property resale is not subject to HST. I would still check with a qualified accountant with your specific situation though.

  4. Colin
    Colin says:

    How does “alternative minimum tax ” work. If I sell a rental property I paid 250,000.00 for 1,500,000.00 in BC do I deduct 250,000.00 from 1,500,000.00 for 1,250,000.00 capital gain. Then pay tax on 625,000.00 at 50% for a tax bill of 312,500.00. I would then add this to my income of net 63,000.00 for total of 375,500.00.

    Are these figures somewhat correct as I was told ” alternative minimum tax ” may boost my tax rate up to around 65% which frankly scares me.

  5. Laurice
    Laurice says:

    What happens with capital gains if you sell a current rental and upgraded to a more expensive rental. For example, selling a 500000 rental to purchase 960000 rental. Is there capital gain in this situation? Or not for an upgrade

  6. Charles
    Charles says:

    Hi Cherry, a question for you. My wife and I paid $125,000 for our primary residence years ago. Today, it value is about $350,000. We are considering moving and renting it out. Suppose we sell it 3-5 years out and the value has not increases at all. My guess is we would not have any capital gain to report, if we hired a qualified appraiser at the time of rental to verify the entire gain in value was when we occupied it. Is that correct?

  7. Winston Yee
    Winston Yee says:

    Hello Cherry
    I have a 2nd house that I purchased for my parents to live in, no rental income
    Currently my dad is now too old to climb the steps and we are thinking to sell and buy a condo for them.
    What are my tax implications to enact this plan.

  8. Jim Bloor
    Jim Bloor says:

    I have a house I rent out but have no other property. I live with my father is the house considered a rental or principle property I have heard both

    • Cherry Chan, Real Estate Accountant
      Cherry Chan, Real Estate Accountant says:

      Number 1 criteria to claim primary residence is that you have to live in the property.
      If you don’t live in the property, you are not allowed to claim the property as your primary residence.

      If you live in the property for a period of time, you can potentially designate the property as your primary residence, or even four more years. Depending on your situation. I would highly recommend you to consult someone who know real estate tax to give you advice.

  9. Dan
    Dan says:

    Hi, great blog post! I had a question about selling a rental property at a loss. If I purchased a place for $500K, and then sold it for $425K, I have a loss of $75K. Am I able to claim the loss against my income for tax savings? Thank you!

  10. Krissy
    Krissy says:

    What happens if I remortgaged the property at one point? I bought for $250,000 16 years ago. Mortgage is 269,000 and it’s worth $420,000. How does one calculate capital gains?

  11. Marc
    Marc says:

    Hi Cherry,
    Thanks for the great website and valuable information. I would like to ask you I currently own an investment property and It is not a rental property. I have not generated any rental income. I bought the property to renovate and sell. I have owned it for just over a year and have upgraded it for the purpose of flipping it for a profit this year. I had purchased the condo for $322K, and I anticipate selling it for $400K. Assuming I make a gross profit of $78K..What deductions can I claim specifically?..I’m aware that I pay a 50% capital gain on my net profit. I understand I can claim my land tax, condo fees, mortgage interest,closing costs,utilities, insurance, legal fees, real estate commissions, renovation upgrades. Is there anything else I can deduct that would increase the adjusted cost base in order for me to pay less as a capital gain?
    I appreciate any insight and advice you can share 🙂
    Thank you Marc

    • Cherry Chan
      Cherry Chan says:

      From your description, this sounds like business income. You should really talk to a professional advisor to make sure you are filing your tax properly.

      Business income is 100% taxable.

  12. ray
    ray says:

    hi i bought a income property under a numbered company.i bought it for 800k sold it for 2.9 mil. 50% paid at closing. 50% in 5 years
    so do i pay tax on 50%now and 50% taxes in 5 years

    • Cherry Chan
      Cherry Chan says:

      Hi Ray, there are deferral opportunity definitely. It is determined on a case by case basis. Be sure to consult a professional accountant to recognize the tax impact.


  13. David
    David says:

    Hi Cherry. My mother inherited a house from my grandmother, my mother passed away this year 2017 and we need to have the house transferred into my fathers name whereas his name was never on title. The property was transferred into my mothers name in June of 2009 and has always been a rental property since transfer. This is a second property whereas they also maintained their principal residence. The only major renovations\expenses that incurred was in 2009-2010 when it was redone for the renters. My questions are; how are the capital gains calculated upon transfer to my fathers name and should we strongly consider digging up receipts for the last eight years for a recapture as you have explained?

  14. Chirag
    Chirag says:

    Hi Cherry,

    Great post. I had a quick question on calculating capital gains tax on the sale of a rental property. If I bought for $250k and sell for $400k would I pay the tax on 50% profit of the $150k difference (i.e. $75k) or would the profit be calculated on the difference post land transfer, legals, closing costs etc. Also, if the rental property is in both mine and my wife’s name, I assume the profit is split and the capital gains tax is calculated according to each of our marginal tax rates. Is this correct?

    Thank you.

    • Cherry Chan
      Cherry Chan says:

      All expenses incurred that are related directly to the sale can be deducted against the sale price. In my example, we often ignore these closing costs to simplify the example.

      You’re right that only 50% is taxable, if your property is a capital property.

      In terms of ownership between you and your wife, it goes to how you have been reporting it and who truly owns the property.

      Good luck!

  15. Nancy
    Nancy says:

    Hi Cherry, I came across this blog while surfing for information on selling a rental property and was sure glad I did. I was told that if you have a rental property and stop renting and move into it and live there for 5 years and then sell that you won’t have to pay any taxes on the property. Are you able to confirm if this is true? I’m thinking of retiring in a few years, selling my residential property in Ontario then giving the tenants notice to move out of my rental property in NL and moving there myself for 5 years and then selling. Can I avoid paying taxes on the property if I do that? Please advise. Thanks in advance.

    • Cherry Chan
      Cherry Chan says:

      Hi Nancy, primary residence exemption is a yearly designation. You can only designate the property as your primary residence at any given year.

      If you live in your Nova Scotia rental property in the five years, you can designate those five years as your primary residence, so no tax would be incurred on that five years.

      But for the years that you rent it out, you will still have to pay tax on it.

      There are some exemption and option available. Be sure to consult your accountant before making your move. It’s a big move, from Ontario to Nova Scotia.

      Have a great weekend!

  16. Tamara
    Tamara says:

    Hi Cherry,
    Do you happen to have a source for the $25000 maximum for capital gains when personal income is less than $220000? I can’t seem to find this info anywhere else. Thanks!

      • Tamara
        Tamara says:

        Maybe I’m misunderstanding something… could you please explain this from the text above:

        “Keep in mind that if you make less than $220,000 personally BEFORE you add in this $50,000, you will be subject to lower tax.

        $25,000 is MAXIMUM you would have to pay on the capital gain.”


Trackbacks & Pingbacks

  1. […] If you sell a property and make substantial gain during the year, make sure you are putting aside sufficient amount of money to pay your taxes at the end of the year. You can refer to how to estimate the tax liability in this blog post. […]

  2. […] Based on today’s tax law, 50% of this capital gain is taxable, so you have $5million taxable income in your personal name. (You can easily refer to my previous blog post on how to calculate tax payable on sale of properties here.) […]

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