Tax Guide: Selling an Income Property Without Nasty Surprises

How does capital gains tax apply to the sale of an income property?

When you sell an income property — whether a duplex, triplex or large multi-unit building — the positive difference between the net sale price and your adjusted cost base (ACB) constitutes a capital gain.

What is the adjusted cost base (ACB)?

The ACB is your acquisition cost plus all capital expenditures added to the property since purchase: roof replacement, additions, window replacements, etc. It is important to document these improvements carefully — they directly reduce your taxable gain.

What is the inclusion rate in 2026?

In Canada and Québec, the capital gains inclusion rate is 50% in 2026. The increase to 66.67% that had been announced in 2024 was cancelled on March 21, 2025 — Québec harmonized to this decision. This means only half of your gain is added to your taxable income for the year.

Deductible expenses from the gain

From the sale price, you can deduct disposition costs directly related to the sale: brokerage commissions, legal fees for the sale, advertising costs. These amounts reduce the proceeds of disposition, and therefore your net gain.

What is CCA recapture and why is it a trap?

Capital cost allowance (CCA) allows you to deduct each year a portion of the cost of the building (building only — not the land) from your rental income. Over time, these deductions reduce the undepreciated capital cost (UCC) of the building.

When you sell, if the sale price of the building exceeds its UCC, the difference is called CCA recapture. And here is the trap:

In practical terms, if you have claimed $80,000 in CCA on your building over 10 years, and you sell at a price above your UCC, you could owe tax, in a single year, on most of that tax benefit. The effect can be brutal on your annual tax bill.

Land vs. building: a critical distinction

Only the building is depreciable — not the land. At sale, the sale price must be allocated between the value of the land and the value of the building (by municipal assessment, certified appraisal, or another reasonable method). This allocation directly affects the amount of CCA recapture and capital gain. An incorrect split can create problems with the CRA or Revenu Québec.

Order of calculation: recapture BEFORE the capital gain

For tax purposes, CCA recapture is calculated and taxed before the capital gain. It is stacked on top of your ordinary income (employment income, net rental income, etc.), which can push you into the highest tax brackets before the capital gain is even accounted for.

Worked example: plex bought for $600,000, sold for $900,000

Here is a concrete example illustrating the two levels of taxation for an individual owner in Québec, in a high tax bracket (combined QC + federal marginal rate of approximately 53.3% on ordinary income above $258,482).

Base data

Calculating the CCA recapture

The net proceeds are allocated proportionally: land (30%) = $261,900 / building (70%) = $611,100.

The building price ($611,100) exceeds the UCC ($360,000) but also the original cost of the building ($420,000). The recapture is capped at the lesser of the sale price and the original cost minus the UCC:

CCA recapture = $420,000 − $360,000 = $60,000 → taxed as ordinary income (100%).

Calculating the capital gain

Gain on the building: $611,100 − $420,000 = $191,100
Gain on the land: $261,900 − $180,000 = $81,900
Total capital gain = $273,000 → 50% included = $136,500 of taxable income.

Do you have to pay GST/QST when selling a plex?

Good news for the majority of property owners: the sale of an existing residential building occupied by tenants is generally exempt from GST (goods and services tax) and QST (Québec sales tax).

The exemption cases (the majority of sales)

• Sale of a used residential building (duplex, triplex, 6-plex, etc.) for exclusively residential use
• The seller is not a builder within the meaning of the Excise Tax Act
• The building has been used for long-term residential rental

Cases where taxes apply

• New building or deemed new: if you have carried out a major renovation (defined as replacing 90% or more of the building's components), the building may be treated as new and the sale is taxable.
• Commercial portion: if your building includes commercial spaces (office, retail), only the commercial portion is taxable.
• Builder-reseller: if you buy properties to resell them (rather than to rent them), you may be considered a builder and subject to taxes.

If you are unsure whether taxes apply to your situation, consult the official resources of Revenu Québec (QST — property sale) or the Canada Revenue Agency (GST — property sales).

How to legally reduce the tax at sale?

Several legitimate strategies allow you to reduce or optimize the tax on the sale of an income property. None makes the bill disappear — but some allow you to spread or significantly minimize it.

1. The capital gains reserve (sale with a vendor take-back)

If you sell your property by financing part of the price yourself (called a vendor take-back or VTB), you do not receive the full sale proceeds in the year of the transaction. In that case you can use the capital gains reserve: only the portion of the gain proportional to the amounts received in the year is taxable, over a maximum of 5 years (with a minimum of 20% of the gain recognized per year).

2. Optimize the timing of the sale

If you anticipate a particularly high-income year (departure bonus, other significant income), delaying the sale to a year when your ordinary income is lower can reduce your effective marginal rate, particularly on the CCA recapture.

3. Rigorously document capital improvements

Every dollar of capital expenditure (major renovations, additions, improvements that increase the value or extend the useful life of the building) increases your ACB and therefore reduces your taxable capital gain. Keep all contracts, invoices and proof of payment for at least 6 years after the sale.

4. Selling costs: deduct them all

Brokerage commission, notary fees for the sale, pre-sale inspection fees if required by the buyer, marketing costs — all these amounts are deductible from the proceeds of disposition. Do not miss any.

5. Do not claim CCA if you plan to sell soon

If your holding horizon is short, it may be wise to limit or stop claiming CCA in order to reduce future recapture. This decision must be analyzed case by case, taking into account the current benefit of the deductions vs. the impact at resale.

What does not work

Contrary to what some believe:

• The lifetime capital gains exemption (LCGE) of $1,250,000 does not apply to rental properties held directly — only to qualifying small business corporation shares (QSBC) and qualifying farm or fishing properties.
• There is no Canadian equivalent of the "1031 exchange": reinvesting in another rental property does not allow the gain to be deferred.
• Selling or giving the property to a related person at a reduced price does not make the tax disappear: the deemed disposition at fair market value (FMV) applies to related persons.

Selling through a corporation: what is the tax impact?

If your building is held in a corporation, the tax rules are different — and often misunderstood.

Corporate tax rate

In a corporation, rental income is investment income (passive income) — it is not eligible for the small business deduction rate. The combined federal-Québec rate on investment income (including CCA recapture and capital gain) is approximately 50.17% in 2026.

The capital dividend account (CDA)

There is good news, however: at sale, the corporation accumulates in its capital dividend account (CDA) an amount equal to 50% of the net capital gain. Funds in the CDA can be distributed to shareholders as a capital dividend, completely tax-free. This is one of the important advantages of corporate ownership.

Refundable dividend tax on hand (RDTOH)

A portion of the tax paid by the corporation on investment income is deposited into an RDTOH account — a refundable tax when taxable dividends are paid to shareholders. This creates a partial integration mechanism between corporate and personal taxation.

Section 85 rollover: tax deferral

If you wish to transfer a personally held property into a corporation without immediately triggering tax, a section 85 tax rollover under the Income Tax Act may allow the gain to be deferred — if the agreed amount in the agreement is set at your acquisition cost. Note: this rollover may trigger land transfer tax (welcome tax), unless certain control conditions are met.

To dig deeper into the profitability and tax calculations for your plex, also see our articles on capital gains on plex sales in Québec 2026 and the costs of selling a plex in Québec.