Selling a rental property in Ontario is not the same as selling your home. There is no principal residence exemption to shield you. What you walk away with after the sale is very likely subject to capital gains tax — and if you haven't planned for it, the bill can be a shock.
This guide breaks down exactly how capital gains tax works for Ontario landlords, what counts as a deductible cost, how the 2024 inclusion rate change affects you, and what strategies are worth considering before you list.
This is not tax advice — always work with a CPA who knows real estate. But this will give you the foundation you need to have that conversation intelligently. For rental market context, CMHC's rental housing resources provide useful data on property values across Ontario.
What Is a Capital Gain on a Rental Property?
A capital gain is the profit you make when you sell an asset for more than you paid for it. For rental properties, the formula is simple in theory:
Capital Gain = Sale Price − Adjusted Cost Base (ACB)
The Adjusted Cost Base is what you originally paid for the property, plus eligible costs added over time (more on that below). The capital gain is then the difference between your net sale proceeds and your ACB.
Only a portion of that gain gets added to your taxable income. That portion is called the inclusion rate.
The 2024 Inclusion Rate Change: What Changed and What It Means
For most of Canada's history, the capital gains inclusion rate was 50% — meaning half of your capital gain was added to your taxable income. The other half was tax-free.
In the 2024 federal budget, the government raised the inclusion rate to 2/3 (66.67%) for capital gains above $250,000 in a given tax year for individuals. Gains below that threshold still use the 50% inclusion rate.
Example:
Say you sell a rental property in London, Ontario and realize a $400,000 capital gain.
- First $250,000 of the gain: 50% included = $125,000 added to income
- Remaining $150,000: 66.67% included = $100,000 added to income
- Total taxable income added: $225,000
At Ontario's combined federal/provincial marginal tax rate for high earners (roughly 53%), that $400,000 gain could result in a tax bill of well over $100,000.
This is why planning matters — and why waiting until the sale is complete to think about this is a costly mistake.
What Goes Into Your Adjusted Cost Base?
Your ACB is not just the price you paid when you bought the property. It includes all the costs you incurred to acquire and improve the property over time. The higher your ACB, the smaller your capital gain, and the lower your tax bill.
Your ACB typically includes:
- Purchase price of the property
- Legal fees on purchase
- Land transfer tax paid at purchase
- Real estate commissions paid when you bought the property
- Title insurance
- Home inspection fees (if paid as part of acquisition)
- Capital improvements made during ownership (not repairs — see below)
The distinction between capital improvements and repairs matters enormously:
- A capital improvement increases the value of the property or extends its useful life. Examples: new roof, addition, finished basement, new HVAC system, new kitchen renovation. These get added to your ACB.
- A routine repair simply maintains the property in its current condition. Examples: fixing a leaky faucet, painting a unit, replacing a broken window. These are expensed in the year they occur on your rental income statement — they do NOT increase your ACB.
If you've owned a rental property for 15 years and made $80,000 worth of capital improvements but never tracked them, you've lost $80,000 of ACB — which means $80,000 more in taxable capital gains when you sell. This is one of the most common and preventable errors small landlords make.
This is also why landlord record keeping in Ontario is not just bureaucratic housekeeping — it directly affects your tax bill years down the road.
Selling Costs Reduce Your Capital Gain Too
You don't pay tax on the full sale price. Your actual proceeds are reduced by the costs of selling.
Eligible selling costs include:
- Real estate agent commissions
- Legal fees on the sale
- Mortgage prepayment penalties (if you broke your mortgage to sell)
- Costs to stage or prepare the property for sale (in some cases)
These costs get deducted from your sale price to arrive at your net proceeds, which is what you compare to your ACB to calculate the actual capital gain.
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What About Depreciation (CCA)?
If you claimed Capital Cost Allowance (CCA) on your rental property over the years, this gets more complicated.
CCA is a tax deduction that lets you depreciate the building portion of your rental property each year. It reduces your taxable rental income. However, when you sell, the CRA "recaptures" the CCA you claimed. That recaptured amount is taxed as ordinary income — not as a capital gain — meaning it's taxed at your full marginal rate, not the 50% or 66.67% inclusion rate.
Many landlords avoid claiming CCA specifically because of this recapture risk. It's a short-term gain (lower rental income tax now) versus a long-term cost (full income tax on recapture at sale). Whether it makes sense for your situation depends on your specific numbers — talk to your accountant before claiming CCA, not after you've been doing it for a decade.
Can You Use the Principal Residence Exemption?
Sometimes — but carefully.
The principal residence exemption (PRE) eliminates capital gains tax on a property you designate as your principal residence. You can only designate one property per family unit per year.
Scenarios where partial PRE might apply to a rental property:
- You lived in the property before converting it to a rental
- You lived in the property after the tenants moved out before selling
- You rented out a portion of your home (basement suite) while living in the rest
In these cases, you may be able to designate the property as your principal residence for the years you lived there, and only pay capital gains tax on the years it was purely a rental.
The calculation is called the partial principal residence exemption formula, and it's worth doing if any of the above applies to you. The CRA has specific rules around when you converted the property to/from personal use, and there are elections you may need to file.
If you bought a property, lived in it, then converted it to a rental, the day you started renting it out is a deemed disposition — the CRA treats it as if you sold it at that point at fair market value. The same happens in reverse when you stop renting and move back in. Getting the valuation right at that point matters.
Selling a Rental with Tenants Still In It
Many landlords in Ontario sell their rental properties with tenants still living there. This is completely legal, and the sale does not automatically end a tenancy.
However, if the new owner wants to use the property personally, they may serve an N12 notice to terminate the tenancy — but that comes with compensation requirements and risks of bad faith claims at the LTB.
The presence of tenants can affect your sale price, your timeline, and your negotiating position. If you're planning to sell and want to understand how the tenancy interacts with the transaction, read our guide on selling a rental property with tenants in Ontario before you list.
Tax Planning Strategies Worth Discussing With Your Accountant
You can't eliminate capital gains tax entirely when selling a rental property — but you can manage when and how much you pay. Here are strategies your accountant may raise:
1. Installment Sales / Vendor Take-Back Mortgage If you finance part of the sale yourself (the buyer pays you over time rather than all at once), the capital gain may be spread across multiple years. This can keep you below the $250,000 threshold each year and keep the inclusion rate at 50%.
2. Timing the Sale If you have a year with lower income coming up (retirement, career change), selling then means the capital gain is added to a smaller income base — potentially pushing you into a lower marginal tax bracket.
3. Capital Losses If you have realized or unrealized capital losses on other investments (stocks, other properties), those can be used to offset capital gains on a rental property sale. Work with your accountant to time the realization of losses strategically.
4. Estate Freeze / Trusts For landlords with multiple properties who are thinking about long-term wealth transfer, more complex structures may be worth exploring. This is well beyond a single blog post but worth raising with a tax lawyer or estate planner.
5. Charitable Donation of Property In rare cases, donating appreciated real estate directly to a registered charity eliminates capital gains entirely on that portion. This is highly situation-specific.
What Landlords Get Wrong Most Often
After dealing with hundreds of property transactions, a few mistakes come up again and again:
- Not tracking capital improvements. Every renovation receipt from 1998 still matters in 2026. Keep them forever.
- Assuming the principal residence exemption covers them. It doesn't cover years the property was purely a rental.
- Forgetting about CCA recapture. If you claimed it, you will pay for it.
- Waiting until after the sale to talk to an accountant. By then, your options are mostly gone.
- Not understanding the $250,000 threshold. A $260,000 gain is taxed very differently than a $240,000 gain under the 2024 rules.
Key Takeaways
- Capital gains on rental property sales are taxable — there is no blanket exemption for investment properties.
- Your capital gain = net sale proceeds minus your Adjusted Cost Base.
- Capital improvements increase your ACB and reduce your tax — track every receipt.
- The 2024 federal budget raised the inclusion rate to 66.67% on gains above $250,000 per year for individuals.
- CCA recapture is taxed as ordinary income, not at capital gains rates — understand this before claiming depreciation.
- The principal residence exemption may apply partially if you lived in the property at some point.
- Strategic timing and planning before the sale can meaningfully reduce what you owe.
If you'd rather not deal with the complexities of managing and eventually selling rental properties on your own, Prospera Properties manages residential rentals in London, St. Thomas, and Strathroy, Ontario. We handle the day-to-day so you can focus on the decisions that actually move the needle — including knowing when and how to exit.