Converting Your Home to a Rental
What happens when your home becomes a rental: the deemed sale, the 45(2) election, the four-year rule and CCA.
The short version
- When you move out and rent your whole home, CRA treats it as sold and bought back at fair market value on the day of the change. That's a "deemed disposition".
- If the home was your principal residence for every year so far, the deemed sale is usually tax-free, but you should still report it and designate the home.
- You can instead elect under subsection 45(2) to treat it as not sold. Then you can keep designating it as your principal residence for up to four more years while it's rented, sometimes longer after a work move.
- With the election, you can't claim capital cost allowance on the property. You still report the rent and deduct the other expenses.
- Renting just a basement or a room usually doesn't trigger any of this.
Converting Your Home to a Rental
Plenty of landlords never planned to be landlords. A job in another city, a bigger house, a partner's place, and the old home becomes a rental because selling felt premature. The tax system has a rule waiting at that exact moment, and a choice that has to be made with that year's return. Make it on purpose.
What Happens on the Day You Change
| Without the election | With the 45(2) election |
|---|---|
| Deemed sale at fair market value on the change date | No deemed sale; the home keeps its original cost |
| Gain up to that date sheltered by the principal residence exemption (for the years designated) | Nothing to shelter yet |
| New cost for the rental = market value at the change date | Cost stays your original cost |
| Years as a rental: not principal residence years | Up to 4 rental years can still be designated as principal residence |
| CCA can be claimed | No CCA while the election is in force |
| Report the deemed sale and designation for the change year | Attach the signed election letter to the return for the change year |
Either way, the rent is taxable and the usual rental expenses are deductible from the date you start renting. See rental income tax and rental property expenses.
Moved out and rented your home?
Enter the purchase price, the date you moved out, the value then and your plans. The SmartFile compares electing and not electing, estimates the tax on a future sale both ways, and prepares the designation.
Should You Make the 45(2) Election?
An example. You bought a condo in 2016 for $350,000, lived in it, and moved out in 2026 when it was worth $500,000. You rent it out for four years and sell in 2030 for $580,000.
| No election | 45(2) election | |
|---|---|---|
| Gain to 2026 ($150,000) | Tax-free (principal residence 2016 to 2026) | Part of the total gain |
| Gain 2026 to 2030 ($80,000) | Taxable capital gain; half included | Covered: the 4 rental years can be designated |
| CCA during rental | Allowed (but comes back as recapture) | Not allowed |
| Catch | None at the change | Rental years designated here can't be used for another home you buy |
The election is usually worth it when you don't buy another home during the rental period, or plan to move back. It's less useful if you buy a new principal residence right away, since you can only designate one property per year and the new home will usually need those years. For the designation rules, see the principal residence exemption.
The Four-Year Limit, and the Work-Move Exception
With the election, you can designate the home as your principal residence for up to four years while it's rented. That limit can be extended when you moved because your employer (or your spouse's) relocated you, you moved at least 40 km closer to the new work location, and you move back into the home while still with that employer or before the end of the year the employment ends. The conditions are strict; check them before relying on it.
How to Make the Election
- Write a short letter stating that you elect under subsection 45(2) of the Income Tax Act for the property, with its address and the date of the change in use.
- Sign it, and attach it to (or send it with) your return for the year of the change.
- Don't claim CCA on the property while the election is in force; claiming CCA cancels it from the start of that year.
- Keep a copy with your property records, along with evidence of the market value at the change date.
Missed it? Talk to a professional before filing the next return; late or missing elections are a judgment call that depends on the facts.
Partial Changes
Renting a basement suite or a room in a home you still live in isn't usually a deemed sale, if the rental is ancillary, you make no structural changes and you don't claim CCA. Turning the house into a separate duplex with you in one unit is different, and can be a partial change in use; the 45(2) election isn't available for a partial change. More on all the variations is on change of use rules.
Other Things That Change
- Mortgage interest on the original purchase loan becomes deductible against the rent, because the borrowed money bought what is now a rental.
- Insurance needs to change to a landlord policy.
- Short-term renting instead of long-term? See Airbnb taxes, including local licensing.
- Moving back later is its own change of use; see converting a rental to your home.
Report the rental on form T776. Return Check confirms the election or designation is on file for the year you moved out.
Home to Rental Questions
What happens for tax when I turn my home into a rental?
You are treated as selling the home at fair market value on the date of the change. If it was your principal residence for all the years until then, the gain is usually tax-free, but you should report the deemed sale and designate the home.
What is the 45(2) election?
An election that lets you treat a home converted to a rental as not sold. You can then designate it as your principal residence for up to four years while it is rented, as long as you do not claim CCA.
How do I make the 45(2) election?
Attach a signed letter describing the property and the date of the change, stating that you are making the election under subsection 45(2), to your return for the year of the change.
Can I claim CCA if I make the 45(2) election?
No. Claiming CCA on the property cancels the election.
Does renting my basement count as a change in use?
Usually not, if the rental is a small part of the home, there are no structural changes and you do not claim CCA.
Sources: CRA, Income Tax Folio S1-F3-C2, Principal Residence (changes in use and the 45(2) election); Guide T4036 Rental Income. Checked October 2026. The example is illustrative. The work-relocation extension has more conditions than shown here, and we are not sure CRA will accept a late 45(2) election in a given case.
Last reviewed October 4, 2026 against CRA and Government of Canada sources. How we check our facts.