What if I’ve rented part of my home?
Surprise Headline: I rented part of my home — could it cost me thousands when I sell?
Quick reality check
If you’ve rented part of your home in Milton, ON, you didn’t just earn extra cash. You created tax and legal issues that affect how much you keep when you sell. Handle them right and you keep most of the upside. Ignore them and the CRA, your insurer, or your mortgage lender can turn profit into problem.
What happens when you rent part of your home in Milton
Short answer: You must report rental income. You may reduce some deductions. You may trigger a “change in use” under the Canada Revenue Agency (CRA), which can affect your principal residence exemption (PRE) and lead to capital gains when you sell.
Key immediate effects:
- Rental income must be declared to the CRA.
- You can deduct expenses related to the rental portion (mortgage interest, property tax, insurance, utilities, repairs) but only for the rented portion.
- If you claim capital cost allowance (CCA) on the rental portion, you risk losing PRE benefits on that portion and creating future recapture.
- For a partial rental, CRA treats the rented area separately. You might face a deemed disposition on the rented portion unless you file an election under s.45(2) of the Income Tax Act.
Milton-specific realities you must know
Local rules matter. Milton is in Halton Region and follows Ontario’s building code, zoning and property standards.
- Basements and secondary suites: Many sales fail because the suite wasn’t permitted. Town of Milton requires compliance with zoning and building code. If your rental space was never legalized, the buyer’s inspector will find out.
- Safety standards: Fire separations, separate entrances and egress, smoke detectors, and proper ventilation are required. Failure risks fines and delayed closings.
- Municipal licensing: Check if Milton requires licensing for secondary suites or short-term rental rules. Penalties can apply.
Action: before you list or continue renting, call Milton building services and confirm permits. If you plan to sell, a legal suite with permits increases buyer confidence and sale price.
Taxes: how the CRA sees your rental income and your sale
This is the money part. Here’s how to think about it like an investor.
1) Reporting rental income
- All rent you receive in Canada must be reported on your tax return. Use form T776 for rental income and expenses.
- Split the income and eligible expenses by the rental portion using square footage or number of rooms.
2) Deductible expenses
You can deduct the portion of:
- Mortgage interest (not principal)
- Property taxes
- Home insurance (rental portion)
- Utilities and repairs connected to the rental area
- Management costs, advertising, legal fees related to the rental
Keep receipts and a clear method for allocation (square footage is best).
3) Change in use and principal residence exemption (PRE)
- If you convert part of your principal residence to earn income, CRA may treat that portion as a deemed disposition at fair market value — which can create a capital gain.
- However, you can elect under s.45(2) to defer that deemed disposition for the rented portion. That preserves your PRE until you actually sell. This election must be filed on your tax return and must be done correctly.
- Don’t claim CCA on the property if you want to preserve PRE. Claiming CCA signals to CRA you’ve started using the property to generate income and will complicate PRE.
4) Capital gains when you sell
- If you properly elect under s.45(2) and avoid claiming CCA, you can often preserve PRE for the full property until sale. But if part of the property was used to earn income and the election wasn’t made, CRA may charge capital gains on the rented portion’s gain.
- Formula: you apportion the capital gain by area (square footage) and by the number of years the space produced rental income versus years used as principal residence.
Example: You lived in the house for 10 years and rented a basement apartment for 3 years without an election. CRA could treat those 3 years as non-qualifying for PRE for the basement portion, creating a taxable capital gain on that share.
Insurance and mortgage: get these right now
- Insurer: Notify your insurer. Standard homeowner policies often exclude rental activity. You need a landlord endorsement or separate rental policy. Failure to notify could void claims if something happens.
- Mortgage: Many mortgages have occupancy clauses. Renting part of your home can breach your mortgage terms. Call your lender to confirm. They may require a consent or adjust your rate.
If your mortgage or insurance is triggered after a claim, lenders or insurers can lay claim to funds or deny coverage.
Practical financial strategies to minimize tax and risk
Be practical. These steps save time and money.
1) Document everything now
- Measure and photograph spaces.
- Keep signed lease agreements and records of rent paid (e-transfers, cheques).
- Keep all invoices — repairs, utilities, insurance, property tax statements.
2) Use square footage to allocate expenses
- Clear and defensible.
- Note shared spaces and split accordingly.
3) Don’t claim CCA unless you’ve planned for the tax hit
- CCA may temporarily reduce taxes but creates complications on sale and may force you to report recapture as income.
4) Consider the s.45(2) election
- If you want to preserve the PRE for the entire property at sale, electing under s.45(2) is often the right move. Talk to a tax pro to file this correctly.
5) Price and market strategy when selling in Milton
- Legal, permitted suites sell better. Buyers value compliance.
- If your suite is illegal or non-compliant, either legalize it before listing or price accordingly and disclose it. Buyers will negotiate.
6) Work with an experienced Milton realtor who knows tax and local rules
- A local expert avoids surprises, positions your home correctly in the Milton market, and connects you to tax pros and contractors.
Step-by-step checklist before listing your home in Milton if part was rented
- Confirm permits and zoning compliance with Town of Milton.
- Notify insurer and mortgage lender; get written confirmations.
- Gather lease(s), rent records, expense receipts, and measurement documentation.
- Consult a tax accountant about s.45(2) election and PRE implications.
- Decide whether to claim CCA (usually don’t if you want PRE).
- Fix safety issues (smoke detectors, exits, electrical) and get municipal clearances.
- Price with the suite’s legal status in mind and disclose rental history to buyers.
Why buyers in Milton care and how it affects sale value
Buyers want certainty. They dislike surprises that trigger permits, fines, or insurance gaps. A legal suite that produces rental income can be a selling point and boost value. An illegal suite reduces pool of buyers and creates risk that lowers sale price.
How Tony Sousa helps Milton sellers navigate this (call to action)
Tony Sousa is a Milton realtor who knows the interplay between taxes, permits and market value in Halton Region. He will:
- Connect you with a tax accountant to file s.45(2) or prepare for capital gains.
- Identify permit and safety gaps and recommend contractors.
- Advise on pricing strategy specific to Milton buyers.
Contact Tony: tony@sousasells.ca | 416-477-2620 | https://www.sousasells.ca
FAQ — Common questions Milton sellers ask about renting part of their home
Q: Will renting part of my home automatically cause me to lose the principal residence exemption?
A: No. Renting part of your home does not automatically eliminate PRE for the whole house. But CRA can treat the rented portion as having a change in use, which can create capital gains on that part. You can often preserve PRE by filing an election under s.45(2) and avoiding claiming CCA.
Q: Do I have to report rent I received?
A: Yes. All rental income must be reported on your Canadian tax return using form T776. Include only the rental portion of expenses.
Q: Can I deduct expenses for the rental portion?
A: Yes. Deduct mortgage interest, property taxes, insurance, utilities and repairs for the portion used to generate rent. Use a fair allocation method, like square footage.
Q: Should I claim CCA on the rental portion?
A: Usually no, if you want to preserve the PRE on sale. Claiming CCA can trigger future tax complications and possible recapture.
Q: Do I need permits in Milton for a basement apartment or secondary suite?
A: Yes. Check Town of Milton zoning and building code rules. Legal suites increase saleability. If the suite is illegal, either legalize it or disclose and price accordingly.
Q: Will my insurer and mortgage lender be okay with renting part of my home?
A: Maybe not. You must notify them. Insurers often require landlord endorsements. Lenders may need consent. Notifying protects you.
Q: How do I minimize tax when I plan to sell soon?
A: Keep records, avoid claiming CCA, consider s.45(2) election and consult a tax professional immediately.
Q: How should I present a rented portion when listing in Milton?
A: Be transparent. Show permits, tenant history, and income statements. A legal and well-documented suite attracts buyers and may increase offers.
Q: Who should I call for help in Milton?
A: A local realtor familiar with taxes, a CPA experienced with real estate change-in-use issues, and a contractor who handles permits. If you want a direct, experienced Milton realtor who will coordinate these professionals, contact Tony Sousa at tony@sousasells.ca or 416-477-2620.
Final word
Renting part of your home in Milton can be smart. It can also create tax and legal landmines. Handle documentation, talk to your insurer, lender and tax pro, and decide whether to elect under s.45(2). Take action now — and work with a Milton-focused realtor who knows how to protect your proceeds and sell fast.
Need help moving forward? Contact Tony Sousa: tony@sousasells.ca | 416-477-2620 | https://www.sousasells.ca
