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Principal Residence Exemption

Learn how to claim the principal residence exemption to avoid tax on the sale of your home, and understand the rules around partial use, inherited property, and capital losses

Getting Started with the Principal Residence Exemption

If you sell your home for more than you paid for it, you may be subject to capital gains tax. However, if the property qualifies as your principal residence, you may be able to avoid paying tax on all or part of the gain. The principal residence exemption is one of the most commonly used tax relief tools available to Canadian homeowners. This guide explains how the exemption works, when it applies, and how to report the sale correctly.

What Is the Principal Residence Exemption?

The principal residence exemption allows you to avoid paying tax on the capital gain when you sell your primary home. To qualify, the property must have been ordinarily inhabited by you, your spouse or common-law partner, or your children during the time you owned it. You do not need to live there every day, but it must have served as your main residence for each year you are claiming the exemption.

Only one property per family unit can be designated as the principal residence for each year. If the property was not your principal residence for the entire time you owned it, or if it was used to earn rental or business income, only a portion of the gain may be exempt.

Why the Exemption Matters

Selling a home can result in a significant capital gain, especially in a strong real estate market. The principal residence exemption can eliminate that tax, but only if the sale is reported properly and the designation is made correctly. Failing to report the sale at all, or incorrectly assuming the exemption applies without proper documentation, can lead to penalties or lost tax relief.

The benefits of understanding the principal residence exemption

  • Avoid paying capital gains tax on the sale of a qualifying home

  • Ensure proper reporting by completing the required designation forms

  • Understand how partial use or income-generating use affects eligibility

  • Know what to do if the home was inherited or gifted

  • Avoid mistakes that could trigger penalties or reassessments

Make the Most of Your Home Sale

If you are selling your home, taking a few steps to understand the principal residence rules can help you avoid costly surprises. This guide will help you determine whether your property qualifies, how to report the sale, and what to do in special situations like inherited property or partial use.

Understanding the Principal Residence Exemption

The principal residence exemption helps you avoid paying tax when selling your home, but it’s important to follow the rules and report it properly. The articles below explain how it works and what you need to do: