We’re selling our cottage and expect to lose money. Can we claim the loss on our taxes?

Q: If we sell our cottage and lose money, can I claim the loss on my taxes?

A: The answer depends on whether your cottage is considered a personal-use property or an investment property, says David Pipe, adviser and mortgage broker at WealthTrack.

In short, if your cottage is used only for your personal enjoyment, you’re out of luck. But if you operate your cottage primarily as a business by renting it out, you can use losses to reduce your taxes by applying them against any capital gains. 

According to the Canada Revenue Agency, you have a capital loss when you sell a property for less than you paid for it, including the cost of upgrades. If the cottage was primarily an income-producing property, a sale at a loss could generate a capital loss, Pipe says. “That typically happens when the cottage is rented out regularly with a genuine intention to earn income, and that income is reported to the CRA.”

Let’s say you bought a cottage for $400,000 and spent $50,000 on qualifying upgrades, then started renting it out through Airbnb and seasonal listings (with little to no personal use), and reported that rental income on your taxes each year.

After several years, you sell the cottage for $300,000. Since it was an income-producing property, Pipe says, you could likely claim a $150,000 capital loss against other capital gains, either now or in the future.

To be considered an investment property, Pipe says, the cottage should be available for rent most of the year (or seasonally), marketed publicly and produce regular income that you report annually. Your own personal use should be minimal or incidental. Even if you rent out your cottage for only a few weeks every summer, the CRA would still consider it a personal-use property. 

A couple of things to consider: if you permanently convert a personal cottage to a rental and begin reporting rental income, Pipe says, future capital gains or losses are treated as investment-related. Any losses from before the conversion remain nondeductible.

If part of the cottage (such as a basement suite or separate cabin) is rented out on a sustained basis, Pipe says the CRA may allow you to divide income, expenses and eventual capital gains or losses between personal and rental use.

For a typical family cottage that’s been used as a place to unwind and get away, a loss cannot be claimed on your taxes, Pipe says.