Principal Residence Exemption (PRE): What Homeowners Need to Know

Your home is more than just a place to live. It’s usually your biggest investment. When you sell your home and its value has gone up, you may face a large capital gain. The good news is that Canada’s principal residence exemption (PRE) can reduce or even eliminate the tax on this gain. If your property was your principal residence for every year, you owned it, you won’t pay any tax on the gain. If it only qualified for some of the time, you may still get a partial exemption.

Eligibility Criteria

To qualify as a principal residence, your home must meet all of the following criteria:

• It’s a housing unit like a house, condo, cottage, apartment, mobile home, trailer, or houseboat.
• You own the property (by yourself or with others), whether as a freehold, leasehold, or through shares in a co-op that lets you live there.
• You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year
• You designate the property as your principal residence.

Designating Your Principal Residence and Calculating the Exempt Gain

You can choose only one property per family per year as your principal residence. If you own more than one, such as a cottage, you’ll need to pick which one to designate each year. If your property wasn’t your principal residence the entire time you owned it, the CRA uses this formula:

Exempt Gain = Total Capital Gain × (1 + Years Designated) ÷ Years Owned

The “+1 rule” generally provides an additional year of shelter to bridge the sale and purchase of different homes. However, it does not apply to years in which you were a non-resident of Canada for tax purposes. Because multi-property and non-resident situations can be complex, professional tax advice is recommended.

Land Size Rule

Many homeowners are unaware of the land size rule. If your property is larger than 1.24 acres, you must demonstrate that the additional land is necessary for the use and enjoyment of your home. Otherwise, only the first 1.24 acres may qualify for the exemption, and you may owe tax on any gain from the excess land.

Capital Losses on Principal Residences

You can’t claim a capital loss if you sell your principal residence for less than you paid. It’s considered personal use property, so losses aren’t tax-deductible.

Reporting the Sale to the Canada Revenue Agency

Since 2016, homeowners are required to report the sale of their home on their tax return, even if no tax is owed. This step helps make sure you receive the full benefit of the principal residence exemption. The process is straightforward and simply involves completing a few forms:

• Schedule 3: Capital Gains (or Losses) on your tax return
• Supplementary Form T2091(IND): Designation of a Property as a Principal Residence

If you forget to report the sale, there may be penalties. If you have questions or need help, your tax advisor or the CRA’s principal residence reporting page can provide more details and guidance.

Example 1 – Selling your only home

Jim and Sandra bought their house in 2011 for $300,000 and sold it in 2025 for $600,000. They lived there the whole time and didn’t own any other property.

• Purchased: 2011 at $300,000
• Sold: 2025 at $600,000
• Total gain: $600,000 – $300,000 = $300,000
• Years owned: 15 (2011–2025)
• Years designated as principal residence: 15 
• Tax owed: $0. Since the exempt portion exceeds the actual gain, the full $300,000 gain is exempt.

Example 2 – Owning a Cottage Too (Partial Exemption)

Using the example above, if Jim and Sandra had purchased a cottage in 2019 for $500,000 and sold it at the same time as the house for $700,000, the cottage would want to shelter the full cottage gain and the rest of years still available on the house. This is done because the cottage average annual gain is higher and will have a higher amount owed than the house. They would need to include $60,000 in taxable income because they were unable to shelter all the house gains.

Calculate the exempt portion for each property:

House

• Exempt gain: $180,000
• Taxable portion:
  $300,000 – $180,000 = $120,000 total gain
• Since only 50% of capital gains are taxable.
  Taxable income: $120,000 × 50% = $60,000

Cottage

Because the exempt gain on the cottage is higher than the actual gain, the entire $200,000 gain is exempt.

*These figures are simplified for illustrative purposes only. Actual results will depend on specific dates, fair market values, and other factors reviewed by the CRA and or your tax advisor.

Flipping Property

If you sell a home (or the right to buy one) that you owned for less than 365 days, the gain is usually treated as business income, not a capital gain. This means the principal residence exemption doesn’t apply in these cases. However, there are exceptions for certain life events (like death, divorce, separation, or a qualifying job move) that may allow you to treat the gain as a capital gain instead.

Changes In Use

If you change how you use your property, for example, from your home to a rental or the other way around, the government treats this as if you sold and then re-bought it at market value. This “deemed sale” may trigger a capital gain which you would need to report.

Under Canada’s tax rules, you may be able to defer the gain if you qualify under:

• Section 45(2): change from principal residence to income property
• Section 45(3): change from income property to principal residence

Farm Property

If you’re a farmer and you sell land used for farming that includes your home, special rules apply to dividing the value between your house and the farmland.

Takeaways

• The principal residence exemption is not automatic and you must report the sale and designate the property.
• Only one property per family can be claimed per year.
• The land size limit and non resident years can reduce eligibility.
• Homes owned for less than 1 year typically don’t qualify for the exemption.

Every situation is unique. If you own more than one property or have a complex scenario, consult a qualified tax professional for advice tailored to your needs. This document provides general information only and does not constitute legal or tax advice. “Information summarized from the Canada Revenue Agency: Principal Residence