Can you claim a capital loss on a principal residence

In a fluctuating real estate market, it's not uncommon for a home to be sold at a price below what was paid for it. Naturally, many homeowners ask whether they can claim a capital loss to offset other gains or reduce their tax liability. However, when it comes to a principal residence, the tax rules are clear—and restrictive.

For most Canadians, a capital loss on a personal home cannot be claimed. But there are a few scenarios involving partial business or rental use where some tax recovery may be possible.

Why Capital Losses on Principal Residences Are Not Deductible

The Canada Revenue Agency (CRA) classifies your principal residence as personal-use property. Capital gains on personal-use property may be exempt if the property qualifies, but capital losses on personal-use property are never deductible.

This applies even when:

The home was your designated principal residence every year
The loss was significant due to market conditions or home improvements
You are not claiming the principal residence exemption (e.g., for strategic tax planning)

Because personal-use property isn’t used to earn income, the CRA does not allow losses on it to be claimed against capital gains from investments, real estate, or other assets.

Important: This rule exists to prevent homeowners from selectively designating or reporting losses only when it is beneficial. The exemption is all-or-nothing, and loss claims on personal-use homes are excluded across the board.

When a Loss Might Be Partially Deductible

There are limited exceptions where a portion of the loss may be claimed—typically when the property was used partly or entirely for business or rental purposes.

You may be eligible to claim a partial capital loss if:

You converted part of the home to a rental or business use and declared a change in use
You reported business or rental income related to the property
You claimed capital cost allowance (CCA) during the rental or business use period
You did not designate the home as your principal residence for all years of ownership

In these cases, the property is considered to have shifted from personal to income-generating use, and losses tied to the business or rental portion may be deductible.

Tip: If you’ve used part of your home as a legal suite or home office, speak with a tax professional before selling. A properly documented change in use and reporting history may allow a partial loss to be claimed—but only for the income-earning portion.

When Capital Losses on a Home May or May Not Be Deductible

Situation	Capital Loss Deductible?	Notes
Sale of fully personal-use home	No	Losses on principal residences are never deductible
Sale of part-personal, part-rental home (no CCA)	No	Still considered personal-use if no CCA or formal change in use filed
Sale of home with rental suite (CCA claimed)	Partially	Loss on income-generating portion may be deductible
Home designated as principal residence in all years	No	Exemption nullifies both gains and losses
Former rental converted to principal residence	Possibly (on prior rental use)	Loss only deductible on rental years and proportionate area

How to Report the Loss If Applicable

If you are eligible to claim a partial capital loss:

Use Schedule 3 to report the sale and calculate the total gain or loss
Apportion the business or rental use percentage and apply the loss only to that portion
Do not apply the principal residence exemption to the business portion
Keep records showing:
- Dates of business use
- Floor area used for income-generating purposes
- Any depreciation (CCA) previously claimed

Important: Any attempt to claim a loss on personal-use property without clear income use history and proper documentation may result in a CRA reassessment and penalties. When in doubt, treat the entire loss as non-deductible unless strong evidence supports a business or rental claim.