Personal Tax
Real Estate

Change in use - What happens if I move into my rental property, or start renting out my home?

Deemed disposition

When there is a change in use of real estate, either from income-producing to personal-use (e.g., principal residence or cottage/second home), or from personal-use to income-producing, there is a deemed disposition.  The owner is deemed to have disposed of the property (land and building), and to have immediately reacquired it, with both transactions done at fair market value.

Change in use from income-producing to personal-use

When the property use changes completely or partially from income-producing to personal use, the deemed disposition can result in a capital gain.  This is calculated by deducting the adjusted cost base of the property from the fair market value at the time of change in use.  Where only a part of the property has changed use (duplex, fourplex, etc.), then there will be a deemed disposition only for that portion of the property.

When there is a capital gain, under certain circumstances the gain can be deferred by making an election under subsection 45(3) of the Income Tax Act.  The election may not be made if capital cost allowance (CCA) has been claimed on the property for any taxation year ending after 1984.  If any CCA was claimed prior to 1985, this may result in a recapture of that  CCA.  To make the election, a letter should be filed with the income tax return for the year in which the property is eventually sold (or earlier if demanded by CRA).  Further information on this election can be found in

Change in use from personal-use to income-producing

When the property use changes from personal-use to income-producing , the deemed disposition can result in a capital gain.  This is calculated by deducting the adjusted cost base of the property from the fair market value at the time of change in use.  Any gain resulting from this deemed disposition can be eliminated by the principal residence exemption if the property has always been the taxpayer's principal residence.  If the property has been the principal residence for only a portion of the time it has been owned, then the gain could still be partially eliminated by the principal residence exemption.

The taxpayer may also defer recognition of the resulting capital gain (if any) by electing under subsection 45(2) of the Income Tax Act to be deemed not to have made the change in use.  This election cannot be made if there is only a partial change in use of the property.  The election should be made when the change in use happens.  Once this election has been made, the property can still qualify as the taxpayer's principal residence for up to 4 taxation years, even if the property is not inhabited during those years by the taxpayer.  However, the taxpayer must still be a resident or deemed resident of Canada during those years in order to designate the property as the principal residence.

The property may qualify as the taxpayer's principal residence for more than 4 taxation years (under certain conditions) if the reason for the change in use is that the place of employment of the taxpayer or the taxpayer's spouse or common-law partner has been relocated.  The conditions (as per subsection 54.1 of the Income Tax Act) include:
    a.    the employer must not be related to the taxpayer or the taxpayer's spouse or common-law partner;
    b.    the property must be at least 40 kilometres farther from the new place of employment than is the subsequent residence; and
    c.    either 
        i.    the taxpayer resumes inhabitation of the property during the term of employment with the same employer, or by the end of the taxation year following the year in which the employment terminates; or
        ii.    the taxpayer dies during the term of the employment.

If the s. 45(2) election was not made when the change in use occurred, CRA might accept a late election under certain circumstances, one of which is that no capital cost allowance has been claimed on the property since the change in use occurred and during the period in which the election is to remain in force.  For further information on late-filed elections, see the CRA Information Circular 92-1, Guidelines for Accepting Late, Amended or Revoked Elections.

There is more information on this topic in CRA's Interpretation Bulletin IT120, Principal Residence.

What if I rent out part of my home or cottage?

When you rent out a part of your home or cottage, you are considered to have changed the use of that part of the home from personal-use to rental property.  Depending on the circumstances, when you eventually sell your home, or have a deemed disposition because you stop renting part of it, you may have to report a capital gain on the portion of your home that you rented out.  The CRA Rental Income Guide, T4036, states that if all of the following conditions are met, you will not be considered to have a change in use:
    - the part of the home used for rental purposes is small in relation to the size of the whole property,
    - you do not make any structural changes to the property to make it more suitable for rental purposes, and
    - you do not claim any capital cost allowance on the part you are using for rental purposes.

If all of the above conditions are met, you will not have to report a capital gain when the property is sold or the rental is stopped.  Otherwise, you will have to report a capital gain based on the portion of the house that was rented.

If you rent out a part of your home, CRA's position is that you may only write off losses against other income if you have a "reasonable expectation of profit" from the property rental.

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Revised: March 01, 2010