A couple has owned their principal residence for 20 years. For 8 of those years, they rented out 40% of the home. When they sell, how does this affect their principal residence exemption?
Correct Answer
D) They must pay capital gains tax on the proportionate rental use during rental years only
When part of a principal residence is used for rental income, the capital gains exemption is reduced proportionately. The couple would pay capital gains tax on 40% of the capital gain attributable to the 8 years of rental use, while the remaining portion maintains the principal residence exemption. This is calculated based on the change-in-use rules under the Income Tax Act.
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