What to take away
- The capital gain is proceeds minus the adjusted cost base and your selling costs, and CRA’s published examples treat half of a capital gain as taxable.
- CCA you claimed is not lost: recapture is added to income in full, while a terminal loss is fully deductible.
- Land and building are reported separately, so the price allocation matters, and the sale is reported even if you owe nothing.
Start with the capital gain formula
For a rental property you own personally, the starting point is the same as for other capital property. You need three amounts: the proceeds of disposition, the adjusted cost base (ACB) and the outlays and expenses of selling. CRA describes the gain as the proceeds minus the total of the ACB and those selling costs. If the result is negative, you have a capital loss instead.
The ACB is generally what you paid, plus costs of buying and improving that are not deductible as current expenses. Legal fees and land transfer tax paid at purchase generally form part of the cost rather than a rental deduction, as the rental income guide explains. Selling costs usually include things like real estate commissions and legal fees on the sale. Keep the closing statement for both the purchase and the sale.
The inclusion rate: what part of the gain is taxed
The taxable part of a capital gain depends on the inclusion rate. On the CRA capital gains pages, the worked examples treat 50 percent of the gain as taxable, and the page on what is new for the 2025 tax year does not announce a change to that rate. Rates can change, so confirm the rate that applies to your year of sale with your accountant before relying on any figure.
The taxable portion is added to your other income and taxed at your marginal rates. That is why a large gain in one year can push you into a higher bracket, and why the timing of the sale, or whether a capital gains reserve is available for proceeds you receive over several years, is worth discussing before you sign.
Recapture and terminal loss on the building
Land is not depreciable, but a rental building is. If you claimed CCA, each claim reduced the building’s undepreciated capital cost (UCC). When you sell, CRA compares the UCC of the class with the lesser of the net proceeds and the original capital cost. If that leaves the UCC negative, the amount is recapture of CCA, and you include it in income for the year of sale.
If a positive UCC remains and you have no other property in that class, the balance is a terminal loss. Unlike a capital loss, it can generally be deducted in full from income in that year. If the balance is exactly zero, there is neither. These rules work by class, so a second rental building in the same class can change the result. CRA’s rental income material notes that you may have to add recapture or deduct a terminal loss in the year you dispose of rental property.
An illustrative example
The numbers below are round and illustrative only. Suppose you bought a rental house for $400,000, with $100,000 of that allocated to land and $300,000 to the building, and claimed a total of $30,000 of CCA over the years, so the UCC is $270,000. You sell for $600,000, allocated $200,000 to land and $400,000 to building, and pay $30,000 in selling costs, split in proportion to price.
On the land, $200,000 minus $10,000 of selling costs minus the $100,000 cost leaves a $90,000 gain. On the building, $400,000 minus $20,000 leaves $380,000, which is more than the $300,000 cost, so the capital gain is $80,000. The recapture is the $300,000 cost less the $270,000 UCC, or $30,000. The total capital gain is $170,000, of which half, or $85,000, is taxable at a 50 percent inclusion rate, and the $30,000 of recapture is added in full. Your actual numbers will differ.
Allocate the price between land and building
CRA instructs that when a sale includes land and a building, you work out how much of the price relates to each and report them separately on Schedule 3. The split matters because only the building carries CCA and therefore recapture, and because a loss on a building is treated differently from a loss on land. CRA also notes that special rules can change the proceeds you use when a building is sold at a loss.
Use a reasonable basis, such as the purchase agreement, a municipal assessment or an appraisal, and keep it. A split that is hard to support invites questions, and the allocation you use on the sale should be consistent with how you allocated the original cost. If you are unsure, ask for the allocation to be reviewed before the sale closes rather than after.
Change in use and the flipping rule
Two special rules catch people who did not expect them. First, a change in use is generally treated as a sale at fair market value followed by an immediate repurchase. Converting your home to a rental, or converting a rental back into your home, can therefore trigger a gain or loss even though nothing was sold, and the gain is reported in the year the use changes. Keep a record of the property’s value on the date its use changes, and see the principal residence guide if the property was ever your home.
Second, under the residential property flipping rule, a gain on a Canadian housing unit, including a rental property, that you owned for less than 365 consecutive days is deemed to be business income rather than a capital gain. Exceptions apply for properties that were already inventory and for certain life events, such as a death, a separation, a serious disability or illness or an eligible relocation. Any loss from a flipped property is deemed to be nil.
How and where to report the sale
Report the sale in the calendar year it happens, on Schedule 3, using the real estate line. CRA states that you must file a return to report a disposition of capital property even if you owe no tax. The taxable capital gain goes on line 12700, while recapture or a terminal loss is reported with your rental income, generally on Form T776. If part of the property was your principal residence, Form T2091(IND) is used to designate it.
Co-owners generally each report their own share. A sale of real estate that is left off a return can be reassessed beyond the usual period, according to CRA, so it is worth reporting even when the result looks like zero.
What to bring to your accountant
Gather the purchase and sale closing documents, a list of improvements, every T776 you filed with its CCA schedule, the UCC at the last year-end, and any appraisal or assessment used for the land and building split. Note any period the property was your home or vacant.
Ask three questions. What is the UCC and will there be recapture or a terminal loss? Is a capital gains reserve available? Does the flipping rule or a change in use apply? The rental expense checklist can help you organize the earlier years’ records, and the rental income guide covers what you could claim while you held the property.
Sources & editorial notes
Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.
- Calculating and reporting your capital gains and lossesCanada Revenue Agency
- Completing Schedule 3Canada Revenue Agency
- Principal residenceCanada Revenue Agency
- Amount of capital cost allowance you can claimCanada Revenue Agency
- New for 2025 for capital gainsCanada Revenue Agency
Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.