I sold my home - principal residence designation

Your principal residence is your main home where you and/or your family live. Your house, cottage, condominium, apartment, trailer, mobile home, or houseboat can qualify as a principal residence if it meets all of the following conditions:

• It’s a housing unit, a leasehold interest in a housing unit, or a share of the capital stock of a co-operative housing corporation you bought so that you can live in a housing unit owned by that corporation
• You own the property alone or with another person
• You, your current or former spouse or common-law partner, or any of your children lived in the property at some time during the year and
• You designate the property as your principal residence.

The land on which your home is located can also be part of your principal residence. Refer to the Canada Revenue Agency (CRA) website for more information on the requirements for qualifying land as part of your principal residence.

Before 1982, families were allowed to designate more than one principal residence in a year (for example, a husband and wife could each designate a property as their principal residence). This was no longer allowed after December 31, 1981 and families could only designate one property as their principal residence.

However, if you disposed of a property that you owned (jointly with another person or otherwise) continuously since before 1982 and if because of the above rule the property can’t be designated as the your principal residence for one or more years after 1981, there is a provision that caps the amount of capital gain (if any) that can be applied to the disposition.

Note: Your family includes:

• You
• A person who was your spouse throughout the year (unless you were separated for the entire year under the terms of a court order or a written agreement)
  • For years 1993 to 2000, a spouse included a common-law spouse. This means, a common-law spouse could not designate a different property as their principal residence for those years.
  • For 2001 and subsequent tax years, the reference to “spouse” was replaced with “spouse or a common-law partner”.
  • If you made an election to have your same-sex partner considered as your common-law partner for 1998, 1999, or 2000, then, your common-law partner also could not designate a different property as their principal residence for those years.
• Your children (unless the child had a spouse during the year or was under 18)
• Your parents (If you didn’t have a spouse and were under 18)
• Your brothers and sisters (If you didn’t have a spouse and were under 18 and your brothers or sisters also didn’t have spouses and were under 18 during the year)

If your home was your principal residence for every year you owned it, you don’t have to pay tax on the capital gain from the sale (principal residence exemption).

Prior to 2016, you didn’t have to report the sale of your principal residence on your tax return. However, starting in 2016, you’ll need to report basic information (date of purchase, proceeds from the sale, description of the property, etc.) on your tax return to claim the principal residence exemption.

If your home was your principal residence for only some of years that you owned it, you’ll need to report the part of the capital gain from the sale of the property for the years it wasn’t your principal residence. To do this, you’ll need to download and complete the following forms from the CRA’s website:

• T2091(IND): Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust)
• T2091(IND)-WS: Principal Residence Worksheet

Once these forms are completed, enter the relevant information on Schedule 3 (and Schedule G, if you’re a Québec resident) in H&R Block's tax software. The CRA also requires that you submit the paper copy of these forms to your local tax centre.

Note: If you’re the legal representative of a deceased person, complete and file form T1255 to designate their property as a principal residence.

You’ll also use form T2091(IND) to calculate the capital gains if you sold, or are considered to have sold, a property for which you or your spouse filed an election to report a capital gain on form T664 or T664 (Seniors) and:

• the property was your principal residence for 1994 or
• you are designating it in 2023 as your principal residence for any tax year

If only a part of your home qualifies as your principal residence and you used the other part to earn rental or business income, you have to split the selling price and the adjusted cost base between the part you used for your principal residence and the part you used for other purposes. You can split the amounts based on the area used as principal residence (square meters or number of rooms) versus for other purposes, as long as the split is reasonable.

Note: The adjusted cost base is the cost of a property plus any expenses you paid to buy it, such as commissions and legal fees. The cost of a capital property is its actual or deemed cost and capital expenditures, such as the cost of additions and improvements to the property. Keep in mind, you can’t add current expenses, such as maintenance and repair costs, to the cost base of a property.

You’ll also need to complete Schedule 3 (and Schedule G, if you’re a Québec resident) for any gains on the part of your home that was used to produce income.

If you change the use of your principal residence to a rental or business property or vice versa, you might have a capital gain or loss.

Every time you change the use of a property, you are considered to have sold the property at its fair market value (FMV) and to have immediately bought the property again for the same amount.  FMV is usually the highest value you can get for your property in an open market. You’ll need to report the capital gain or loss in the year the change of use takes place. There are exceptions and in certain situations the rules for change in use don’t apply. Refer to the CRA website to learn more on what these exceptions are.

Example: Let’s say that you bought your principal residence for $200,000. Two years later, you changed its use to a rental property and the fair market value is $300,000 at that time. This becomes the new cost of your property. The gain of $100,000 in the first two years would be tax exempt since the property was your principal residence.

Now, let’s say you sold the rental property three years later for $450,000, you would then have a capital gain of $150,000 and would need to pay tax on this amount as the property was no longer your principal residence. If, instead, you decide to change the use of the rental property to your principal residence again, the fair market value of $450,000 will be the new cost of your property and you’ll still need to report the gain of $150,000.

If you sold your principal residence* in 2023, you’ll need to complete the TP-274-V: Designation of Property as a Principal Residence form (as well as the federal T2091(IND) form), to avoid having all or a portion of any profit considered a taxable capital gain.

*You can designate a property as your principal residence only if you, your spouse, your former spouse, or your child ordinarily used the property as your housing unit during the year and if all of the following conditions are met:

• You own the property, alone or jointly with another person
• You are not designating any other property as your principal residence for the year
• For years after 1981, no other property was designated as a principal residence for the year by
  • you or your spouse (unless you lived apart throughout the year, due to a judicial separation or a written separation agreement)
  • your child, unless, during the year, he or she had a spouse or was aged 18 or over
  • your father or mother, or your brother or sister (unless your brother or sister had a spouse or was aged 18 or over), if you yourself did not have a spouse and were not aged 18 or over during the year

Important: You can’t designate the property as your principal residence for Québec income tax purposes if you didn’t make the same designation with the Canada Revenue Agency (CRA). Keep proof that the designation was made with the CRA in case Revenu Québec asks to see it.

If you designated the property as your principal residence or made an election to change the use of the property with the CRA, you must mail Revenu Québec a copy of any documents sent to the CRA proving the designation or choice. Include your Designation of a property as a principal residence by an individual (other than a personal trust) [T2091(IND)] form (if applicable), as well as your federal return. Mail them to Revenu Québec by the latest of these dates:

• the 30th day following the election or exercise of the election with the CRA
• the filing due date of your return

If you fail to provide Revenu Québec with a copy of the documents you submitted to the CRA within the prescribed time, you might have to pay a penalty of $25 per day, up to a maximum of $2,500.

Remember, if you have a capital gain from the sale of your property, you’ll also need to complete Schedule 3 and Schedule G to report the gains.

Follow these steps in H&R Block’s 2023 tax software:

1. On the left navigation menu, under the Credits & deductions tab, click Required.
2. Click the Special situations heading.

3. At the bottom of the Special situations page, answer Yes to the question: In 2023, did you sell your principal residence (or a property that used to be your principal residence), or do you have a deemed disposition to report for your principal residence (your principal residence is now a rental property or business, etc.)?
   
   
4. Select the applicable option in the list, then click Continue. When you arrive at the Principal residence designation page, enter your information into the tax software.

Note: If you’re a Québec resident, you also need to complete form TP-274-V: Designation of property as a principal residence. To do this, make sure you followed the previous steps, and then follow these:

1. On the left navigation menu, under the Credits & deductions tab, click Required.

2. Go to the QC - Principal residence designation page.
   
   
3. When you arrive at the QC - Principal residence designation page, enter your information into the tax software.

Note: If you also need to complete Schedule 3 and Schedule G to report capital gains from the sale of your property, these can be found on the Pension contributions & expense page, under Investments on the Credits & deductions tab. Both these forms are combined in H&R Block's tax software.