What is the Principal Residence Exemption (PRE)?

A rule in the federal Income Tax Act that wipes out the capital-gains tax on a home you lived in. It covers each year you designate, provided you or someone in your family unit "ordinarily inhabited" the property that year. A Canadian-resident individual can designate one property per family unit per year. When fully designated for every year of ownership, the PRE eliminates 100% of the capital gains tax on the sale. The PRE is the single largest tax shelter most Canadians ever use, and it does not apply automatically.

How is capital gain calculated on a BC home sale?

Start with the sale price and subtract your adjusted cost base (what you paid, plus capital improvements and transaction costs). That difference is the gross capital gain. Half of it is added to your income for the year of the sale; that half is the federal inclusion rate. The 66.67% inclusion rate that was proposed for gains above $250,000 was CANCELLED on March 21, 2025, so the rate is 50% across the board. Without the PRE, that included gain is added to your other income and taxed at your marginal rate. With a full PRE designation for every year owned, the inclusion is offset to zero.

Do I have to file anything if my entire gain is PRE-exempt?

Yes. Since the 2016 tax year, every sale of a principal residence must be reported on your personal tax return, on Schedule 3. The exemption itself is claimed on Form T2091, "Designation of a Property as a Principal Residence". This is the single rule most BC sellers do not know exists. Failing to file triggers a penalty of $100 per month, to a maximum of $8,000, and on audit it can cost you the exemption retroactively. The PRE is not automatic. You report and designate.

I owned two properties. Which one do I designate?

Only one property per family unit, per year. So if you owned a Vancouver condo and a Whistler cabin at the same time for several years, you have to choose which one gets the exemption for those overlapping years. As a rule, pick the property that gained more per year. There is also a "+1 rule": one bonus year is added to whatever period you designate. It exists so that the year you buy a replacement home does not cost you a year on either property. Where both homes gained a lot, the gap between the best choice and a careless one is often tens of thousands in tax, so it is worth having an accountant run it.

How does PRE interact with BC Home Flipping Tax?

They are separate statutes with separate tests, and the federal PRE does not exempt you from the BC tax. PRE (federal) exempts the capital gain on a property you ordinarily inhabited, designated year by year. The BC Home Flipping Tax (provincial) applies to a sale within 730 days of buying: 20% of the profit if you sell inside 365 days, then tapering in a straight line to 0% at day 730. It has its own exemption list for life events: death, serious illness, separation, a work relocation and others. It also has its own relief for owner-occupiers: a deduction of up to $20,000 from the taxable profit. That one requires you to have owned the home at least 365 days and lived in it as your primary residence. The instructive case is a seller at, say, eighteen months. Federally the PRE is available, so the capital gain can be sheltered in full; provincially the flipping tax still applies at a tapered rate, less the $20,000 deduction. The trap is the short hold. Sell inside 365 days and you lose both at once. The federal anti-flipping rule removes the exemption, and the $20,000 BC deduction is out of reach because you did not hold the home a year. Model both before you list, not after.

How does PRE interact with the federal anti-flipping rule?

The federal anti-flipping rule took effect on January 1, 2023. Sell residential property you have held less than 365 days and the profit is treated as business income, fully taxable, and the rule removes the exemption for those sales outright. If you sell within 365 days, you cannot claim the PRE on that sale (subject to specific life-event exemptions matching the BC Home Flipping Tax list). After 365 days, capital gains treatment and PRE eligibility return. The practical line: if you sold after 13 months, you may be eligible for full PRE federally. If you sold at 11 months, you owe full federal income tax on 100% of the gain, even if it was your only home.

I rented out part of my principal residence. Does PRE still apply?

Partly. A basement suite you rent while living upstairs generally does not cost you the exemption. CRA calls that "ancillary" rental use and allows it on three conditions. The renting has to stay secondary to your own use of the home. You cannot have made structural changes to accommodate it. And you cannot have claimed Capital Cost Allowance (depreciation) on the rented portion. If you rented out the full house for several years and lived elsewhere, those years are not eligible for PRE designation. Claiming that depreciation triggers a "change in use", which is treated as though you sold the rented part. Check with your accountant before relying on the exemption for any year with rental income.

I'm a non-resident selling a BC property. Does PRE apply to me?

Generally no. The PRE is available to a Canadian-resident individual for years they were ordinarily resident in Canada. A non-resident (under the Income Tax Act's residency tests) selling a BC property is not eligible to claim PRE for non-resident years. Additionally, non-residents disposing of "taxable Canadian property" face withholding under section 116 of the Act: typically 25% of the gross sale proceeds withheld until a Section 116 Certificate is obtained from CRA. The withholding is not the final tax; it's a deposit against the actual liability. Non-resident BC sellers should engage a CPA experienced in cross-border real estate tax months before listing.

What if I forgot to file T2091 in a prior year?

You amend the earlier return and designate the property then. The form is the T1 Adjustment Request. CRA accepts late designations in many cases, particularly where the omission was accidental and the exemption would have applied anyway. But a late-filing penalty can apply: $100 a month, to a maximum of $8,000. The longer you leave it, the harder the conversation. If you are not sure you filed correctly on a sale in 2021 or 2022, ask your accountant to check. Three years of that penalty is $3,600, and filing now avoids it.

Principal Residence Exemption: BC Seller Reference

A full principal residence exemption (PRE) removes the capital gain on your home from your income; without it, half the gain is added to your income and taxed at your marginal rate, roughly $130,000 of tax on a $500,000 gain in the highest BC bracket. The designation is not automatic: reporting the sale on Form T2091(IND) and Schedule 3 has been mandatory since the 2016 tax year. The increase in the inclusion rate to 66.67% on gains above $250,000 was cancelled on March 21, 2025, so the rate is 50%.

Worked examples

Example 1: Point Grey detached, lived-in 12 years, full PRE

Bought $1.6M in 2014, sold $3.5M in 2026, a gross capital gain of $1.9M. The family lived there as its principal residence for all 12 years and designates every year on Form T2091(IND). Federal capital-gains tax is $0. Schedule 3 and Form T2091(IND) must still be filed.

Example 2: White Rock detached at $2.4M with a Whistler cabin overlap

White Rock detached: bought 2010 for $1.2M, sold 2026 for $2.4M (16 years, $1.2M gross gain). Whistler cabin: bought 2018 for $900K, still owned at the sale. A family unit can designate one property per year.

For 2010–2017 the choice is forced, since only the house was owned. For 2018–2026 the family picks the higher per-year gain, typically the White Rock house, which limits the cabin’s designation when it is eventually sold. A CPA needs to run the optimization at sale time, including the +1 rule for the year the second property was acquired.

Example 3: Fort Langley townhouse $1.5M, sold at 11 months

Bought $1.35M, sold $1.5M after 11 months, a gross profit of $150K. The federal anti-flipping rule (effective Jan 1, 2023) deems this 100%-included business income with NO PRE available. Marginal-rate tax on $150K added to other income at the BC top marginal rate is approximately $80K–$87K. The BC Home Flipping Tax adds 20% × $150K = $30K, because the two are separate statutes. Total tax is ~$110K–$117K.

Sold at month 13, anti-flipping does not apply: capital gains at 50% inclusion (~$25K–$28K) plus a BC Home Flipping Tax of ~$22K, phased toward 0% by day 730. Hold-period planning matters more than purchase price for short-hold sellers.

Example 4: Walnut Grove townhouse with basement-suite rental income

Bought $850K, sold $1.05M after 8 years. A legal basement suite ran for 6 of those years (~25% of floor area, $1,800/mo rent, no depreciation claimed). PRE applies to the whole property because the rental was ancillary, no structural change was made for it, and no capital cost allowance was claimed. The full exemption covers the $200K gross gain.

Had the seller claimed CCA on the rental portion, a change-in-use election would partially disqualify the PRE on that portion. Verify with your CPA before claiming.

Reporting a principal-residence sale is mandatory

Since the 2016 tax year, every disposition of a principal residence must be reported on:

Schedule 3 of your T1 personal tax return: reports the disposition.
Form T2091(IND): designates the property as principal residence and elects PRE for specified years.

Failing to file is a CRA penalty trigger ($100 per month, max $8,000) AND can cost the exemption retroactively on audit. Confirm your CPA filed the T2091 for any principal-residence sale since 2016. If not, file a T1 Adjustment Request now.

Frequently asked questions

I owned two properties. Which one do I designate?
Only one property per family unit, per year. So if you owned a Vancouver condo and a Whistler cabin at the same time for several years, you have to choose which one gets the exemption for those overlapping years. As a rule, pick the property that gained more per year. There is also a "+1 rule": one bonus year is added to whatever period you designate.
It exists so that the year you buy a replacement home does not cost you a year on either property. Where both homes gained a lot, the gap between the best choice and a careless one is often tens of thousands in tax, so it is worth having an accountant run it.
How does PRE interact with BC Home Flipping Tax?
They are separate statutes with separate tests, and the federal PRE does not exempt you from the BC tax. PRE (federal) exempts the capital gain on a property you ordinarily inhabited, designated year by year. The BC Home Flipping Tax (provincial) applies to a sale within 730 days of buying: 20% of the profit if you sell inside 365 days, then tapering in a straight line to 0% at day 730.
It has its own exemption list for life events: death, serious illness, separation, a work relocation and others. It also has its own relief for owner-occupiers: a deduction of up to $20,000 from the taxable profit. That one requires you to have owned the home at least 365 days and lived in it as your primary residence.
The instructive case is a seller at, say, eighteen months. Federally the PRE is available, so the capital gain can be sheltered in full; provincially the flipping tax still applies at a tapered rate, less the $20,000 deduction. The trap is the short hold. Sell inside 365 days and you lose both at once.
The federal anti-flipping rule removes the exemption, and the $20,000 BC deduction is out of reach because you did not hold the home a year. Model both before you list, not after.
I'm a non-resident selling a BC property. Does PRE apply to me?
Generally no. The PRE is available to a Canadian-resident individual for years they were ordinarily resident in Canada. A non-resident (under the Income Tax Act's residency tests) selling a BC property is not eligible to claim PRE for non-resident years. Additionally, non-residents disposing of "taxable Canadian property" face withholding under section 116 of the Act: typically 25% of the gross sale proceeds withheld until a Section 116 Certificate is obtained from CRA.
The withholding is not the final tax; it's a deposit against the actual liability. Non-resident BC sellers should engage a CPA experienced in cross-border real estate tax months before listing.

Primary sources: CRA Income Tax Folio S1-F3-C2 (Principal Residence) and CRA Form T2091 (designation).

Sources: CRA, Government of Canada(4)

Income Tax Folio S1-F3-C2: Principal ResidenceCRA, retrieved Aug 2, 2026
Principal residence and other real estateCRA, retrieved Aug 2, 2026
What’s new for capital gains — inclusion rate stays at one-halfGovernment of Canada, retrieved Aug 2, 2026
Form T2091(IND) — Designation of a Property as a Principal ResidenceCRA, retrieved May 9, 2026
bc.tax.capital_gains_pre_interaction, v1, in the Codex

Sources: BC Government(2)

BC Home Flipping TaxBC Government, retrieved Nov 5, 2026
Residential Property (Short-Term Holding) Profit Tax ActBC Government, retrieved Nov 5, 2026
bc.flipping_tax, v1, in the Codex

Bronson Job PREC, REALTOR® at Momentum Realty Inc.. GVR Member #6015742 · FVREB Member #FJOBBR

Last reviewed June 10, 2026 by Bronson Job PREC, REALTOR®. Licence CC BY 4.0. How we verify.

I’m Bronson Job, a REALTOR® (PREC) with Momentum Realty Inc., so I earn a commission when I help someone buy or sell. This is general information, not advice on your situation, and I take no payment from any third party named here. How I verify.