--- title: "Selling a Rental Property in Canada: Capital Gains, Recapture" url: https://www.everstonecpa.com/blog/selling-a-rental-property-canada-tax description: "Tax on selling a rental property: the gain is expected, the CCA recapture is not. See three steps, the land-and-building rule, and the 365-day flip rule." type: guide updated: 2026-10-08 summary: "Selling a rental property produces up to three separate tax outcomes, not one. Proceeds are split between land and building, capital cost allowance previously claimed is recaptured as income, and any gain above original cost is a capital gain. A depreciable building cannot produce a capital loss." faq_count: 8 publisher: EverStone CPA Inc., a Chartered Professional Accountant firm registered with CPA British Columbia and CPA Alberta service_area: British Columbia, Alberta, Ontario and Manitoba language: en-CA contact: info@everstonecpa.com · https://www.everstonecpa.com/book-online --- [Home](https://www.everstonecpa.com/) [Blog](https://www.everstonecpa.com/blog) Selling a Rental Property in Canada Selling a rental # Selling a rental property: *recapture, capital gain and the order the numbers work in* By EverStone CPA · Reviewed July 2026 · 8 min read Most owners see a rental sale as one number: proceeds minus cost. The return does not. A sale can produce fully taxable recapture, a capital gain, a [terminal loss](https://www.everstonecpa.com/blog/terminal-loss-canada), or a combination, and the order you work them out decides the answer. That order is fixed; follow it and little judgement is left. Related: [Accounting for short-term rental hosts](https://www.everstonecpa.com/accountant-for-short-term-rental-hosts-bc). **Quick answer:** Selling a rental property produces up to three separate tax outcomes, not one. Proceeds are split between land and building, [capital cost allowance](https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/sole-proprietorships-partnerships/report-business-income-expenses/claiming-capital-cost-allowance.html) previously claimed is recaptured as income, and any gain above original cost is a capital gain. A depreciable building cannot produce a capital loss. **Sold, or selling, a rental?** We work out the capital gain and CCA recapture, split land from building and file the return, with rental returns from $275. [Get My Fixed Quote](https://www.everstonecpa.com/book-online?service=personal#enquiry-form) The recapture is the part sellers do not budget for, and it is knowable before the sale closes. [Send us the numbers](https://www.everstonecpa.com/book-online?service=personal#enquiry-form). Three outcomes, in a fixed order — not one number. ## Step 1: split the proceeds between land and building Do this first. Land is not depreciable; the building is, so the sale price must be split between them on a reasonable basis, ideally supported by an appraisal or assessed values, not a convenient round number. Selling costs work the same way: legal fees reduce proceeds for the capital gain or loss, and for recapture of CCA or a terminal loss. Commissions go on Schedule 3 as outlays and expenses. ## Step 2: settle the building — recapture or terminal loss The building sits in a CCA class with an undepreciated capital cost (UCC). On sale, the class drops by the **lesser of** net building proceeds and original cost. Terminal loss and recapture both come from this class balance: recapture if it goes negative, a terminal loss if it stays positive with nothing left in the class. From there: - **Recapture.** If removing that amount drives the class balance negative, you have a recapture of CCA. It is included in rental income in the year of the sale — ordinary income, taxed in full, not a capital gain. In practical terms, recapture claws back the CCA deductions you took in earlier years, because the building did not depreciate after all. - **Terminal loss.** If the class balance is still positive and you no longer own any property in that class, you may have a terminal loss: an amount of capital cost you never got to deduct. It is usually subtracted from rental income in the year of disposition and can create a rental loss. This makes CCA on a rental a timing decision, not a free deduction, worth thinking about each year. If recapture and terminal loss are unfamiliar terms, our primer on [CCA classes](https://www.everstonecpa.com/blog/capital-cost-allowance-cca-classes-canada) covers the arithmetic. **Selling a rental this year?** We model the recapture and the capital gain before you list, then prepare the return that reports it: rental returns are commonly $275–$500, quoted before we start. See [our rental tax returns](https://www.everstonecpa.com/rental-income-tax-return), or [get a quote before you sell](https://www.everstonecpa.com/book-online?service=personal#enquiry-form). [Get My Fixed Quote](https://www.everstonecpa.com/book-online?service=personal#enquiry-form) ## Step 3: the capital gain A capital gain on the building arises only to the extent the proceeds exceed the *original capital cost* — the portion between UCC and capital cost is recapture, not gain. The land produces its own capital gain or loss, measured against its adjusted cost base. Both are reported on Schedule 3. One rule always surprises: **you cannot have a capital loss on depreciable property**. A building sold below cost produces no capital loss; the shortfall appears, if at all, as a terminal loss. Land can produce a capital loss normally. ## The land-and-building anti-avoidance rule A terminal loss on a building is fully deductible and a capital loss on land is not, so it is tempting to shift price to land. Where a building sells below both its cost amount and capital cost, and you or a non-arm’s-length person owned the land under or beside it, special rules can deem a different price, adjusting the land to match. The calculation differs if land and building sold in different years. If your sale pairs a building loss with a land gain, involve a CPA before filing. ## The 365-day flipped property rule A gain on a housing unit in Canada, including a rental, owned for **less than 365 consecutive days** is deemed *business income*, not a capital gain, unless the property was already inventory or the sale was due to, or in anticipation of, a defined life event. Business income is fully taxable, with no principal residence exemption, so identify short holding periods before calculating an adjusted cost base. ## Rental property held for sale: two things to check before you list - **Whether any part of the property was ever your home.** If it was, some of the gain may be sheltered, and there may have been a deemed disposition at the moment the use changed. Work through [the change in use rules](https://www.everstonecpa.com/blog/change-in-use-rules-property-canada) first, because they reset the cost base and can change the whole calculation. - **Whether pre-sale repairs are being treated correctly.** The cost of repairs made in anticipation of selling, or as a condition of sale, is capital rather than current. See [current versus capital expenses](https://www.everstonecpa.com/blog/rental-property-current-vs-capital-expense). Getting this wrong in the final year is common and entirely avoidable. ## The order, in one line - **Split the proceeds between land and building.** - **Settle the building** — recapture of the capital cost allowance claimed, or a terminal loss. - **Then the capital gain**, on what is left after the first two. Allocate the proceeds between land and building. Deduct selling costs. Settle the class: recapture if it goes negative, terminal loss if it stays positive with nothing left in the class. Then compute the capital gain on anything above original capital cost, and the separate gain or loss on the land. Report the dispositions on Schedule 3 and the recapture or terminal loss on Form T776. Put simply, for a sale of rental property CRA expects up to three results worked out in that fixed order, not one number for proceeds minus cost. ## The bottom line Rental sale tax is rarely simple. Most surprises come from unmodelled recapture, an unsupported land-building allocation, or an unreported change in use years earlier, all cheaper to handle before closing. A CPA who works with [real estate investors](https://www.everstonecpa.com/accountant-for-real-estate-investors) can model the outcome while you still have choices, including whether to claim CCA before a sale. Whether any of this applies to you turns on your year-end, your structure and what else is in the picture — [ask about your own situation](https://www.everstonecpa.com/quick-question) and a CPA replies, usually the same business day. Free either way. Recapture, the gain and any terminal loss are all reported together on [the personal return it all lands on](https://www.everstonecpa.com/personal-taxes). Sources - [Canada Revenue Agency — Guide T4036, Rental Income (selling your rental property, recapture and terminal loss)](https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/t4036/rental-income.html) - [Canada Revenue Agency — Principal residence and other real estate (flipped property rules)](https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-12700-capital-gains/principal-residence-other-real-estate.html) This article is general information for Canadian business owners and is current as of July 2026. It is not tax, legal or accounting advice, and your situation is unique, so please [speak with a CPA](https://www.everstonecpa.com/book-online?service=personal#enquiry-form) before acting on anything here. About this article **EverStone CPA** Prepared and reviewed by a CPA at EverStone CPA, serving businesses in BC, Alberta, Ontario and Manitoba. [About the firm →](https://www.everstonecpa.com/about) · [Send an enquiry →](https://www.everstonecpa.com/book-online?service=personal#enquiry-form) Working through this locally? We advise owners on it as an [accountant in Abbotsford](https://www.everstonecpa.com/accountant-abbotsford). ### Keep reading [Change in use rules →](https://www.everstonecpa.com/blog/change-in-use-rules-property-canada) [Current vs capital expense →](https://www.everstonecpa.com/blog/rental-property-current-vs-capital-expense) [For real estate investors →](https://www.everstonecpa.com/accountant-for-real-estate-investors) Common questions ## Frequently asked questions about selling a Rental Property in Canada **What is recapture when I sell a rental property?** Recapture is earlier capital cost allowance brought back into income because the building did not actually depreciate. If removing the net building proceeds from the class leaves a negative balance, that amount is included in [rental income](https://www.everstonecpa.com/rental-income-tax-return) in the year of sale, as ordinary income, not a capital gain. **Can I have a capital loss on a rental building?** No. Depreciable property cannot produce a capital loss. If the class balance stays positive and no property remains in the class, you may have a terminal loss instead, usually deducted from rental income in the year of sale; it can create a rental loss. **How do I split the sale price between land and building?** On a supportable, reasonable basis, typically an appraisal or assessed values, consistent with how the purchase price was allocated. It matters because only the building is depreciable. If the building sells at a loss and the land at a gain, anti-avoidance rules can deem different building proceeds. **What is the 365-day flipped property rule?** A gain on a housing unit in Canada, including a [rental property](https://www.everstonecpa.com/rental-income-tax-return), held for less than 365 consecutive days is deemed business income, not a capital gain: fully taxable and not sheltered by the principal residence exemption. Exceptions apply for inventory, or sales due to or in anticipation of certain life events. **Should I stop claiming CCA before I sell?** It is worth modelling. CCA is optional, and every dollar claimed lowers the undepreciated capital cost, increasing recapture on sale. CCA on a rental also cannot create or increase a rental loss. Before a planned sale, decide whether to claim it with the projected disposition in view. **What if the rental used to be my home?** Then a change in use occurred, generally a deemed disposition at fair market value on that date. It resets your cost base and may have been reportable then; the principal residence exemption may shelter the gain for the years it was your home. Apply the change in use rules before calculating the gain on sale. **How does the CRA tax the sale of a rental property?** A rental sale can produce fully taxable recapture of the CCA you claimed, a capital gain, a terminal loss, or a combination, and the order in which they are worked out decides the answer. The sale price is split between land and building first, because only the building carries CCA. **How do I report the sale of a rental property?** On your personal return. Split the proceeds between land and building and deduct the selling costs first; then report the dispositions of the land and the building on Schedule 3, and any recapture or terminal loss on Form T776. ## Thinking about selling a rental? Send us the purchase year, the CCA you have claimed and the asking price. A CPA replies by email within one business day with an estimate of the tax and a fixed fee for the return. [Get My Fixed Quote](https://www.everstonecpa.com/book-online?service=personal#enquiry-form)[Book a Paid Advice Call](https://www.everstonecpa.com/advice-call) ## Have a question about this? Ask free through [the quick-question form](https://www.everstonecpa.com/quick-question); a CPA replies by email within one business day. A 45-minute paid **Advice Call** is $225 plus GST, booked by email and credited to your first invoice if you become a client within 60 days. Want us to take it on? [Send an enquiry](https://www.everstonecpa.com/book-online?service=personal#enquiry-form). [Ask a Free Question](https://www.everstonecpa.com/quick-question) [Book a Paid Advice Call](https://www.everstonecpa.com/advice-call) Email info@everstonecpa.com ★★★★★ “…have been completing my bookkeeping, taxes and financials for the last 2 years and they have been amazing. Thank you!” R. 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