A family may own a property as their principal residence and then move out to another property due to the change of job or new purchase of a new property. The family may rent the old property out and earn some rental income and then sell it out some years later. The family may question that if the old home still gets the tax exemption for the whole amount of capital gain during the rental periods. First of all, we need to know some rules for the principal residence exemption: – The principal residence exemption generally exempts all or a portion of the gain from the sale of the home from tax if the home was the family’s principal residence for all years in which they own it and live in it for some periods of time. – A cottage can also qualify even if the family lived there only for a couple of weeks. – Only one home per family can qualify as a principal residence for any particular year. Second, if the family lived in the home and subsequently rent it out, the home can still qualify as their principal residence for up to 4 years during the rental periods. However, the family must file a tax election to make it works. Keep in mind, this rule does not apply if the capital cost allowance has been claimed during the rental periods. Third, the election should be done in the year the property was rented out. However, most of taxpayers didn’t know the rule and their accountants may also not know the rule as well. It ended up by paying more taxes than it should be. Finally, if the family knew this rule later on and wanted to make the tax election, the later filing penalty would be placed. In this case, the family should do the math and find out if it worth for them to make the tax election.
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