Change of Use: Moving Into a Rental or Renting Out Your Home (CRA Rules, 2026)
Changing a home to a rental (or back) triggers a deemed sale at fair market value under the Income Tax Act. CRA rules and the 45(2) and 45(3) elections.
When a property changes from personal use to income-producing or the reverse, the Income Tax Act treats it as sold and repurchased at fair market value that day. Any gain to that point is realized: tax-free if the property was your principal residence, taxable if it was a rental. Two elections defer this: subsection 45(2) when you move out and start renting (keeps the home eligible as your principal residence for up to four more years, if you claim no CCA), and subsection 45(3) when you move into a former rental (lets you designate it as principal residence for up to four years before the move, if no CCA was ever claimed). The election is made by letter with your return for the year of the change; late elections are possible but penalized.
Figures come from the CostToClose capital gains calculator.
Direction 1: your home becomes a rental (45(2))
Without the election: deemed sale at today's value, gain to date is exempt (principal residence), new cost base is today's value, and future gain is taxable. That is often fine.
With the election: no deemed sale; you may continue to designate the property as your principal residence for up to four years while it is rented, provided you do not claim capital cost allowance and do not designate another property for those years. Useful when you expect to move back, or when the rental period will be short and you would rather keep the exemption running than lock in today's value.
Direction 2: your rental becomes your home (45(3))
Without the election: deemed sale, gain to date is taxable now, a real tax bill with no cash from a sale.
With the election: no deemed sale, and you may designate the property as your principal residence for up to four years before you moved in, provided no CCA was ever claimed on it. The gain during the rental period is then partly sheltered by the plus-one formula. This is the election most owners of a single rental should know about before they move in.
Worked example from the calculator
Bought a condo in 2018 for $420,000, rented it 2018–2023 (no CCA claimed), moved in January 2024, sell in 2026 for $640,000, $30,000 selling costs, gain $190,000.
| Metric | No election | 45(3) election filed |
|---|---|---|
| Deemed sale in January 2024 at $580,000 | Gain $160,000 realized, $80,000 taxable | None |
| Years owned | 9 (2018–2026) | 9 |
| Years designated principal residence | 2024–2026 = 3 | 2020–2026 = 7 (four years before the move plus the years living there) |
| Exempt fraction at final sale | (3+1)/9 on the post-2024 gain only | (7+1)/9 = 89% of the whole $190,000 |
| Capital gain taxed | $160,000 (2024) + most of the 2024–2026 gain | ≈ $21,000 |
| Approximate tax at 43% on the taxable half | ≈ $34,000 + | ≈ $4,500 |
The election has to be filed with the 2024 return; CRA accepts late 45(3) elections with a penalty. Reproduce this.
Conditions and traps
- CCA. Claiming depreciation on the rental ends the availability of 45(3) permanently and shortens 45(2). Many owners of one rental never claim CCA for this reason.
- Partial changes (renting a basement suite) trigger the rule only for the changed portion, and only if the change is "structural" or the rental is more than incidental; CRA's administrative position exempts minor ancillary rentals.
- One property per year. Designating this property under either election means not designating another home for those years.
- Non-residents. Years of non-residency cannot be designated.
- Elections are by letter, not a form, attached to the return for the year of the change, and cannot be revoked once made.
Frequently asked questions
Do I pay capital gains when I move into my rental property?
Not immediately if you file a 45(3) election; without it, the change of use is a deemed sale and the gain to that date is taxable in that year.
Can I rent out my house and keep the principal residence exemption?
Yes, for up to four years under a 45(2) election, provided you claim no CCA and designate no other home. Employment relocation can extend the four years.
What is a deemed disposition?
A tax event where the property is treated as sold at fair market value even though it was not, triggering any gain. Change of use, death and emigration are the common causes.
How do I file a 45(2) or 45(3) election?
By a signed letter attached to your tax return for the year of the change, identifying the property and the subsection. Keep proof of filing.
Can I claim CCA on a rental and still use the elections?
No for 45(3); 45(2) is unavailable in any year you claim CCA. Decide before you file the first rental return.
Sources
- Canada Revenue Agency, Income Tax Folio S1-F3-C2, Principal Residence — change in use (paragraphs on 45(2) and 45(3)) — checked 14 Sept 2026
- Canada Revenue Agency, Changes in use of property (T4037 guide) — checked 14 Sept 2026
- Income Tax Act, subsections 45(1)–(4) — checked 14 Sept 2026
This guide gives general information for Canadian home buyers and sellers, checked against the sources listed above on the date shown. It is not legal, tax, or mortgage advice. Because rules and rates change, confirm current figures with your lawyer or notary, your lender, or the government office that administers the tax before relying on them.