How long do you have to live in your principal residence before selling?
Published on October 25, 2023
How long do you have to live in your principal residence before selling, without penalty? You must live there for at least 12 months, or the gain from the sale will be taxed as income. However, there are certain situations where exemptions are possible.
Before selling your principal residence, shortly after buying it, there are things you need to know.
Summary:
- Determine whether your home is considered a primary or secondary residence
- How long you must live in your principal residence before selling
- Taxation on the sale of your principal residence
- 3 aspects of the principal residence exemption
- Tax reporting of capital gain from the sale of real estate
Determine whether your home is a primary or secondary residence
The property where we spend most of our time is usually referred to as our principal residence. A second home is often a place you go to get away—a cottage or condo, for example.
It’s important to know that the owner can choose which property to designate as their principal residence for a given year as long as it’s been lived in during that year. It’s essential to specify the designation of each property year by year when planning to sell one of your residences because of possible tax implications.
If the property sold is designated as a secondary residence, part of the capital gain is taxable, whereas the principal residence is exempt. It’s essential to know which is which, to make the most advantageous decision in your situation.
How long do you have to live in your principal residence before selling?
Since January 1, 2023, Canada’s residential property flipping rule provides a straight answer. To avoid the Canada Revenue Agency (CRA) treating gains from the sale of a residential property as fully taxable business income, you must live in your principal residence for more than 365 days.
Determine occupancy period
The occupancy period starts the moment you take possession of the property, which must be held for 12 months before it can be sold without being subject to the new rule, nicknamed the “Anti-flipping rule”.
It’s possible to live in your principal residence less often than in your second home during this period and still effectively occupy the premises. The important thing is that the owner or family members live there for a few weeks during the year.
Taxation on the sale of your principal residence
Generally, an owner who sells their principal residence is not required to pay taxes on the capital gain because of the principal residence exemption. This applies if you designate a property as your principal residence for all the years you owned it.
3 aspects of the principal residence exemption
Here’s how it’s possible to be exempt from paying taxes on the sale of a principal residence.
1. Capital gain on the sale of a house
A homeowner can take advantage of the principal residence exemption to pay no tax on the capital gain (profit) realized on the sale of their primary residence. The exemption applies each year the property is designated as a principal residence.
In other words, the capital gains on a property designated as a principal residence from purchase until sale will not be taxable. For a secondary residence, 50% of the capital gain must be declared in the annual tax return in the same way as stocks, bonds and mutual funds.
2. Conditions to qualify for exemption
Under certain conditions, you can sell your home less than 12 months after buying it without being fully taxed on the gains. Any of the following situations must occur to apply for the exemption:
- Death
- Divorce or separation
- Threat to personal safety
- Disability or serious injury
- Relocation less than 40 kilometres to the new workplace
- Insolvency
- Involuntary loss of property, for example, in the event of a fire
- New members joining the household, such as the arrival of a new baby or taking in a relative
- Involuntary termination of employment
3. Calculation of capital gain or loss
Calculating the capital gain resulting from the sale of a property is relatively straightforward. It’s the total amount of the transaction minus the original purchase price.
Certain capital expenses may be deducted along with the initial purchase price. This is known as the adjusted cost base (ACB). You must conserve all documents related to the original transaction (purchase price, improvements, land clearing, surveying, appraisal, brokerage fees, etc.) in order to claim deductions.
Conversely, calculating a capital loss involves taking the original purchase price minus the total amount of the transaction. In certain circumstances, you could incur a capital loss. If a property is sold for less than the purchase price, 50% of the losses can be offset against taxable capital gains.
Tax reporting of capital gains from a real estate sale
There are many factors to consider when declaring capital gains, including the type of property sold, the total purchase cost and the selling price. Taxpayers who usually file their own tax returns may have the necessary experience to complete them correctly; however, it can still be beneficial to call on the expertise of a chartered accountant.
When filling out the capital gains declaration for the sale of a real estate property in Quebec, you’ll need all the information about the property sold—property type, location, purchase date and price and the selling price.
You must indicate the type of transaction that the declaration is intended for. It’s often a sales transaction, but exceptions are possible. Now, it’s time to calculate the actual capital gain. To do this, subtract the purchase price and associated costs from the selling price. The difference between the selling price and total cost is the gross net capital gain. Once you have fully and accurately completed your declaration, send it off to Revenu Québec.
In light of this information, how long do you need to live in your principal residence before selling it? A minimum of 12 months or 365 days or the gains from the sale will be taxed as income. However, there are certain exemptions, such as in the event of separation or death.
Would you like to sell a property? We have teams available all across Quebec that include advisors, representatives, real estate coaches, appraisers and notaries. With DuProprio, you have access to the visibility and support you need to sell your property successfully! Find out more about our services by watching our short video or calling us at 1-866-387-7677.
