Capital Gains Tax on Rental Property
Understand how tax may be calculated when you sell Canadian rental or investment property.
The short version
- Selling a rental creates two kinds of income: recaptured CCA (fully taxable) and a capital gain (half taxable).
- Only the building was depreciable; the land and building split changes the answer.
- Recapture goes on T776 line 9947; the gain goes on Schedule 3, lines 13599 and 13800.
- Owned less than 365 days? The flipping rule can make it business income.
When you sell a rental property, the tax comes in two pieces: a capital gain, half of which is taxed, and “recaptured” depreciation, all of which is taxed. People usually plan for the first and get surprised by the second.
Piece One: Recaptured CCA
If you claimed capital cost allowance (CCA, the tax version of depreciation) on the building over the years, you got a deduction every year for wear and tear. When you sell for more than the building's remaining tax value, CRA says the wear and tear did not really happen, and it takes those deductions back. That is recapture.
Recapture is added to your income in full, like a paycheque. Claimed $60,000 of CCA over ten years? Expect $60,000 of extra income in the year you sell, on top of the capital gain.
It is not a penalty. You got the deduction early and pay it back later, which is usually still a good deal. It just needs to be in the plan.
Piece Two: The Capital Gain
The gain is the sale price, minus what you paid (plus legal fees and land transfer tax when you bought, plus improvements), minus selling costs like commission and legal fees. Half of it is added to your income.
A building can never have a capital loss. If the building sells for less than its remaining tax value, that shortfall is a terminal loss instead, deductible in full.
Why the Land Split Matters
CCA is only allowed on the building, never on the land under it. So both the purchase price and the sale price have to be split between land and building, usually using the property tax assessment for that year or an appraisal.
The split changes the answer. More value on the building at sale means more recapture; more on the land means more capital gain. Pick a split you can back up with a document, not one that just happens to come out cheapest.
A Worked Example
You bought a rental for $400,000 (30% land), spent $20,000 on improvements, claimed $60,000 of CCA, and sold for $700,000 with $35,000 of selling costs.
| Item | Amount |
|---|---|
| Building cost ($280,000 share of price + $20,000 improvements) | $300,000 |
| Less CCA claimed | -$60,000 |
| Remaining tax value of the building | $240,000 |
| Recaptured CCA (fully taxable) | $60,000 |
| Capital gain on the land | $79,500 |
| Capital gain on the building | $165,500 |
| Total capital gain (half taxable) | $245,000 |
| Added to income: $60,000 + $122,500 | $182,500 |
For an Ontario employee earning $90,000, that adds roughly $82,000 of tax for the year. That is why the cheque from the lawyer should not all go to a new truck.
Where It Goes on Your Return
- Form T776 (rental income): recapture on line 9947, or a terminal loss on line 9948, and the building comes out of its CCA class (see form T776 explained).
- Schedule 3, Part 3 (“Real estate, depreciable property, and other properties”): one line for the land, one for the building. Total proceeds on line 13599, total gain on line 13800.
Selling a rental this year?
The Rental Sale SmartFile works out the capital gain, the CCA recapture and the forms, with the land and building split done properly.
Traps to Watch For
- Owned it less than 365 days? The flipping rule makes the profit fully taxable business income, unless an exception applies.
- Ever lived in it? Part of the gain may be sheltered by the principal residence exemption, and moving in or out may have triggered a deemed sale back then.
- Co-owned? Each owner reports their own share of everything, including their own CCA.
- Buyer paying you over time? A capital gains reserve can spread the gain over up to five years.
- Instalments. A big balance owing this year can mean CRA asks for quarterly instalments next year.
Rules of Thumb
- Before you list, add up the CCA from every past T776. That number is coming back.
- Find the land and building split for the year you bought and the year you sell.
- Gather receipts for improvements. Each one lowers the gain.
- Put the estimated tax in a separate account on closing day.
Get a quick estimate with the free rental property sale calculator.
Get the exact numbers for your return
The rental property sale SmartFile handles the land split, your ownership share, recapture or terminal loss, and the capital gain, estimates the tax, and prints the exact T776 and Schedule 3 lines on one worksheet.
Selling an Airbnb or Short-Term Rental
A short-term rental sells like any other rental: a capital gain on the land and building, plus recapture of any CCA claimed. If it was also your home part of the time, part of the gain may be covered by the principal residence exemption. Watch for one extra: if the city didn't allow short-term rentals, the expenses you deducted may be denied for those years. Rules: Airbnb and short-term rentals.
How much tax do I pay when I sell a rental property in Canada?
Half of the capital gain is added to your income, plus all of any recaptured CCA, and both are taxed at your marginal rate in the year of sale. The rental property sale calculator estimates the total.
What is recaptured CCA?
The depreciation (capital cost allowance) you claimed on the building, added back to income when you sell the building for more than its remaining tax value.
Can I avoid recapture?
Not by selling. Recapture applies to CCA already claimed. Not claiming CCA in the first place avoids it, but also gives up the yearly deduction.
Is a loss on a rental building deductible?
A building cannot have a capital loss, but selling it for less than its remaining tax value creates a terminal loss, which is fully deductible.
How is selling an Airbnb property taxed?
Like any rental: half the capital gain is taxable, and any CCA you claimed comes back as recapture. If you also lived in it, part of the gain may be exempt as a principal residence.
General information based on CRA guide T4036 and Schedule 3, current in October 2026; see our sources. CanadianTaxes.ai is not the CRA.
Related: the rental property tax guide (income, expenses, CCA), the Canadian real estate tax guide, the principal residence exemption if you ever lived there, and how to find the right tax help for a complicated sale.
Last reviewed October 5, 2026 against CRA and Government of Canada sources. How we check our facts.