How to Protect Your Tax-Free Capital Gains When Buying a Second Property

Nick & Dan explain Canada's Principal Residence Exemption (PRE) and Section 45(2) elections, focusing on how to protect tax-free capital gains when buying a second property. The discussion covers how capital gains work in Canada (50% inclusion rate), the PRE's tax-free benefit, and the critical Section 45(2) election that allows homeowners to continue claiming their former home as a principal residence for up to 4 years after converting it to a rental.

• One exemption at a time: You can only designate one property per year as your principal residence, but buying a second property doesn't immediately eliminate the exemption on your first home
• Section 45(2) election protects you: When converting your home to a rental, this election prevents a deemed disposition and lets you continue claiming it as your principal residence for up to 4 more years—but you must not claim depreciation (CCA) on the property
• Change-of-use creates tax exposure: Without the Section 45(2) election, moving out and renting your home triggers a deemed disposition at fair market value, potentially creating a taxable capital gain even though you haven't actually sold

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