What is considered Principal Residence?
A principal residence is the primary location that a person inhabits. It is also referred to as a primary residence or main residence. It does not matter whether it is a house, apartment, trailer, or boat, as long as it is where an individual, couple, or family household lives most of the time.
When filing personal income tax returns, reporting a property sale can be confusing and expensive, depending on value appreciation and the capital gains tax owed.
Under Canada’s Income Tax Act (ITA), the sale of a residence can be exempted from tax under the Principal Residence Exemption (PRE).
People should be aware that only one property per year, per family (spouse or common-law partner and children under 18), can be designated a principal residence.
Your principal residence can be any of the following types of housing units:
- A house
- A cottage
- A condominium
- An apartment in an apartment building
- An apartment in a duplex
- A trailer, mobile home, or houseboat
- A property has to qualify to be a principal residence.
A property qualifies as your principal residence for any year if it meets all of the following 4 conditions:
- It is a housing unit, a leasehold interest in a housing unit, you acquire only to get the right to inhabit a housing unit owned by that corporation.
- You own the property alone or jointly with another person.
- You, your current or former spouse or common-law partner, or any of your children lived in it at some time during the year.
- You designate the property as your principal residence.
- The land on which your home is located can be part of your principal residence. Usually, the amount of land that you can consider as part of your principal residence is limited to 1/2 hectare (1.24 acres).
However, if you can show that you need more land to use and enjoy your home, you can consider more than this amount as part of your principal residence. For example, this may happen if the minimum lot size imposed by a municipality at the time you bought the property is larger than 1/2 hectare.
When you sell your home, there’s a good chance you’ll get more than you paid for it. The real estate market usually tends to rise. This is one of the major benefits of owning a home or a property.
If your house is worth more than its adjusted cost base then, the government requires you to pay taxes on the profit which you gained by selling it. Your principal residence, however, is a special exception.
Profit from the sale of a property is a taxable capital gain. The principal residence exemption makes you free from paying capital gains tax on the sale of a residence that is the principal residence for you or your family unit, or a home that has a principal residence designation.
If you own and live in only one house, that’s your principal residence and you won’t have to include the income you generate from the sale of this property as capital gains income. According to the Income Tax Act, you can designate only one property as your principal residence in any given year.