Principal residence exemption: Would a senior get a tax credit for selling their house if they move out?
The principal residence exemption allows a homeowner to sell their home and receive the proceeds tax-free. A home can include a house, an apartment, a cottage, a mobile home, a trailer or even a houseboat.
Principal residence exemption, according to the CRA
There are a few important criteria from the Canada Revenue Agency (CRA) to claim the principal residence exemption, David. One is that the taxpayer must ordinarily inhabit the home for each year that the exemption is claimed. That does not necessarily mean that they need to live in the home at the time of the sale. This is a common misconception. I have even come across people who mistakenly think that moving into a rental property and living there for a year before they sell it makes the proceeds tax-free. News: It does not.
The principal residence exemption is based on each year of ownership. As an example, if someone owned a house and a cottage for 10 years, then sold their home and moved into their cottage and lived there another 20 years, they may be able to claim the principal residence exemption for both properties. That is, they may claim the principal residence exemption for their house for the 10 years it was owned, and then claim a prorated principal residence exemption for their cottage. The prorated exemption would be based on the 20 years out of 30 years (2/3 or 66.6%) that the cottage was the only property they lived in and owned (more details to follow on the formula).
Interestingly, a cottage can be claimed as a principal residence even if you only live in it for part of the year. The principal residence exemption is not for the home you primarily live in, but for any home that you ordinarily inhabit over the year.
Every year of ownership counts
To dig a little deeper on the formula for the principal residence exemption, there is a special “plus 1” rule that adds one year to the years of ownership when calculating the exemption.
The reason is so that if you sell and buy a property in the same year, you can still treat both properties as your principal residence in that year. It also means if someone moves out of their house and sells it the next year, the property may qualify as their principal residence for that additional year.
To sell or keep a home for a senior
One question for you, David: Why the is property not being sold despite the senior moving into a retirement residence? I appreciate this can be a sensitive subject. For a homeowner who is starting to lose their independence, they may not want to sell their home or move out in the first place. Or they may want to reserve the right to move back home, even if it is unlikely to happen. For children, the home may be the one they grew up in and they are emotionally attached to it.