Selling Part of Your Property
Severing a lot from your property: principal residence and the half-hectare rule, capital gain or business income, cost split and HST.
The short version
- Sever a lot from your property and sell it, and CRA wants to know three things: was the land part of your principal residence, did you build or subdivide as a business, and what did that piece cost you.
- The principal residence exemption normally covers the home and up to half a hectare (about 1.24 acres). Extra land is only covered if it was necessary to use and enjoy the home, for example when the municipality wouldn't let you sever it.
- If you can sever and sell a lot, CRA generally sees it as land that wasn't needed for the home, so the gain on it is usually a taxable capital gain. Half is taxed.
- Severing once and selling raw land is usually a capital gain. Subdividing into several lots, servicing them or building to sell can make it business income, fully taxed, and HST can apply.
- Your cost for the severed lot is a fair share of what you paid for the whole property, plus severance costs: surveys, planning fees, legal fees.
Selling Part of Your Property
Every rural road has someone thinking about it: the back half of the property is just sitting there, the township might allow a severance, and a building lot is worth real money. It can be a very good deal. It can also be a surprise tax bill, because the tax-free treatment you count on for your home doesn't automatically stretch to a lot you carve off and sell. Here's how the tax works before you call the planner.
How the Gain Is Taxed
| Situation | Usual treatment | Read more |
|---|---|---|
| Home on half a hectare or less, sell the whole property | Tax-free under the principal residence exemption | Principal residence exemption |
| Sever a lot from land over half a hectare and sell it | Capital gain on the lot; half taxable | Capital gains tax |
| Excess land the municipality wouldn't allow you to sever | Can be part of the principal residence for those years | Principal residence exemption |
| Subdivide into several lots, service them, or build and sell | Often business income, fully taxable, and possibly HST | House flipping |
| Vacant land you held as an investment | Capital gain | Vacant land |
Thinking about severing a lot?
Tell the assistant the lot size, what you paid for the whole property and when, what the lot might sell for, and whether you'd build on it. It estimates the tax, the HST question and the cost to use.
Working Out the Cost of the Severed Lot
- Split the original cost. Allocate what you paid for the whole property between the part you keep and the part you sell, usually by their relative values. An appraisal at the time of severance is the best evidence.
- Add severance costs: survey, consent application, planning and engineering reports, legal fees, development charges you paid.
- Subtract selling costs from the sale price: commission, legal fees.
Example: you bought 10 acres with a house in 2005 for $300,000. A one-acre lot is severed in 2026 and sells for $250,000. An appraiser says the lot was 10% of the property's value when you bought, so its cost is $30,000; severance costs are $25,000 and selling costs $12,000. Gain: $250,000 – $30,000 – $25,000 – $12,000 = $183,000, half taxable. The tax at your income is in the capital gains calculator.
HST on a Severed Lot
A sale of land by an individual is usually exempt from GST/HST. It can become taxable when the land was used in a business, when you sell it as part of a business of developing land, or when it comes from subdividing into more than two parts. A single severance of one lot from your home property is usually exempt; repeated severances and developer-style projects often aren't. See GST/HST when building a house and GST/HST on new homes.
Before You Apply for the Severance
- Get a valuation now, before the severance changes values. It supports both the cost split and the principal residence claim.
- Decide your plan: sell raw land (capital), or build and sell (often business). Mixing the two muddies the answer.
- Report the home sale correctly when you eventually sell the house; see reporting a principal residence sale.
- Family deal? Selling the lot to a child below market has its own trap; see property to children.
Thinking of building a second dwelling instead of selling? A garden suite or additional unit keeps the land and adds rental income; Ontario rules are explained at GardenSuiteOntario.com.
Severing Land Questions
Is selling a severed lot from my home tax-free?
Usually not entirely. The principal residence exemption generally covers the home and up to half a hectare. If a lot can be severed and sold, CRA generally treats it as land not necessary for the home, so its gain is usually a taxable capital gain.
How do I calculate the cost of a severed lot?
Allocate the original purchase price between the severed lot and the rest of the property, usually by relative value at purchase, then add severance costs such as surveys, planning fees and legal fees.
Is HST charged when I sell a severed lot?
A sale of land by an individual is usually exempt. HST can apply if the land was used in a business, sold as part of a development business, or created by subdividing into more than two parts.
Is a lot severance a capital gain or business income?
A single severance and sale of land you held as your home or an investment is usually a capital gain. Subdividing into several lots, servicing them or building to sell can make it business income.
What is the half-hectare rule?
The principal residence exemption normally covers up to half a hectare of land with the home. More can qualify only if it was necessary for the use and enjoyment of the home, such as when local rules prevented severing it.
Sources: CRA, Income Tax Folio S1-F3-C2, Principal Residence; Guide T4037. Checked October 2026. Severance cases depend heavily on facts and court decisions have gone both ways; CRA's general view is summarized here. The HST rules on land sales by individuals have detailed conditions; get advice before a second severance or any development. The example is illustrative.
Last reviewed October 5, 2026 against CRA and Government of Canada sources. How we check our facts.