Taxes When You Sell or Refinance a Hotel or Apartment Building
How selling a hotel or apartment building is taxed in Canada and the U.S.: capital gains, recapture, vendor financing, and why a refinance is different.
Updated & fact-checked Figures are linked to their sources at the end of the article.
Owners of a hotel or apartment building who want to take money out usually choose between two routes: sell the property, or refinance it and keep it. The tax results are very different. A sale can trigger tax on the gain and on years of depreciation claimed; a refinance generally triggers no tax at all, but it changes how much interest you can deduct and leaves the deferred tax in place.
This article explains how each route is taxed in Canada and in the United States, for owners who are planning an exit or a refinance in the next few years. It is general information, not tax advice. Rules depend on whether you own personally, through a corporation, partnership or trust, and on where you and the property are. Speak to a tax adviser before you sign a listing or a term sheet.
Why a refinance is not a sale
Borrowing against a building is not income, because the loan must be repaid. You can refinance at a higher value, take cash out and owe no tax on the proceeds in either country. The gain stays inside the property until you sell.
What the refinance does change is the interest deduction. In Canada, interest is deductible only if the borrowed money is used to earn income from a business or property, and the Canada Revenue Agency looks at the current use of the money, not the fact that a rental building secures the loan.[3] Cash taken out of an apartment building and used to buy a cottage generally produces non-deductible interest. Whichever country you are in, keep the paper trail showing where refinance money went.
What a sale is taxed on
A sale of a building has two taxable pieces in both countries: the gain on the land and building above what you paid, and the depreciation you claimed over the years, which is “recaptured” when the sale price shows the building did not really lose that value.
| Item | Canada (federal rules) | United States (federal rules) |
|---|---|---|
| Gain above original cost | Capital gain; generally one-half is included in income | Long-term capital gain; maximum rate generally 15% or 20% |
| Depreciation claimed | Recaptured capital cost allowance (CCA) is fully included in income | Unrecaptured section 1250 gain, taxed at up to 25% |
| Extra tax on investment income | None separately | 3.8% net investment income tax above income thresholds |
| Payment received over several years | Capital gains reserve: generally spreads the gain over up to five years | Installment method, but depreciation recapture income is reported in the year of sale |
| Reinvesting in another rental property | No deferral for rental property | Possible deferral through a 1031 exchange |
The sources behind each row: the Canadian inclusion rate and reserve are from the CRA capital gains guide,[1] recapture of CCA from the CRA rental income guide,[2] U.S. rates from IRS Topic 409,[4] the net investment income tax from IRS Topic 559,[5] installment sales from IRS Publication 537,[6] California from the Franchise Tax Board,[7] and the Canadian replacement-property limits from the CRA folio.[8]
Depreciation recapture: the part owners underestimate
In Canada, depreciation is claimed as capital cost allowance. Buildings generally go in Class 1 at 4% a year, and land is not depreciable.[2] When you sell, if the proceeds allocated to the building exceed the undepreciated capital cost of the class, the difference up to the original cost is recaptured CCA, reported as income.[2] Each rental property that cost $50,000 or more must be in its own class, so recapture on one building cannot simply be absorbed by others in a pool.[2] If the building sells for less than its undepreciated cost and no property is left in the class, the shortfall is a terminal loss, which is deductible.[2]
In the U.S., residential rental property is depreciated over 27.5 years and nonresidential real property, which includes most hotels, shopping centers and offices, over 39 years.[11] On a sale, the part of the long-term gain that comes from that depreciation is taxed at a maximum of 25% rather than the usual capital gains rate.[4]
Two practical consequences follow. First, the split of the price between land and building matters on both sides of a sale: the seller wants less allocated to the depreciated building, the buyer wants more. Agree on it in the purchase agreement and support it with an appraisal. Second, a long-held, heavily depreciated building can produce a tax bill well above what the “capital gain” alone suggests.
Spreading the tax when the buyer pays over time
Owners who carry back a mortgage for the buyer can usually spread the tax.
Canada. When you sell capital property and receive part of the price in later years, you may be able to claim a capital gains reserve. Generally, most reserves can be claimed for up to four years, so the gain is included in income over five years.[1] The reserve applies to the capital gain, not to recaptured CCA.
United States. A sale with at least one payment after the year of sale is generally reported on the installment method, so the gain is taxed as payments arrive. You can elect out and report the whole gain in the year of sale.[6] As noted above, depreciation recapture income is reported up front.
Reinvesting: deferral exists only in the U.S.
U.S. owners who want to buy another property can defer the whole gain with a like-kind exchange under section 1031, provided they follow its deadlines and use a qualified intermediary. We explain the rules in 1031 exchanges: how to defer tax when you sell investment property.
Canada has no equivalent for rental buildings. The replacement property rules cover involuntary dispositions and voluntary sales of “former business property”, and the CRA says that definition excludes rental property.[8] An owner-operated hotel may be in a different position from an apartment building, which is a question for your adviser.
Selling across the border
UBU works with owners in Nova Scotia and California, and cross-border sellers face withholding rules on top of income tax.
- A non-resident of Canada selling Canadian real estate must notify the CRA before the sale or within ten days after it. The CRA issues a certificate of compliance once it has received tax or acceptable security on the gain, and a buyer who does not receive the certificate can be liable for the vendor’s tax.[9]
- A foreign person selling U.S. real estate is subject to FIRPTA: the buyer generally must withhold 15% of the amount realized.[10]
In both cases the withholding is a prepayment, not the final tax, but it ties up cash at closing and needs planning months ahead.
Before you list or refinance
Rebuild your tax cost
Original price, land and building split, capital improvements, and CCA or depreciation claimed every year.
Estimate both routes after tax
Compare net cash from a sale, including recapture and provincial or state tax, with net cash from a refinance and its interest cost.
Settle the price allocation early
Land, building and furniture and equipment each have different tax results; negotiate the split with the buyer.
Decide on vendor financing knowingly
It can spread the capital gain, but recapture may be taxed at once.
Check residence and withholding
Section 116 in Canada or FIRPTA in the U.S. can hold back part of the proceeds.
Plan the use of refinance cash
Interest stays deductible only while the money is used to earn income.
Sources
- Capital Gains – 2025 (Guide T4037) — Canada Revenue Agency, February 11, 2026. Checked 2026-10-12.
- Rental Income (Guide T4036) — Canada Revenue Agency, March 27, 2026. Checked 2026-10-12.
- Income Tax Folio S3-F6-C1, Interest Deductibility — Canada Revenue Agency, August 8, 2024. Checked 2026-10-12.
- Topic no. 409, Capital gains and losses — Internal Revenue Service. Checked 2026-10-12.
- Topic no. 559, Net investment income tax — Internal Revenue Service. Checked 2026-10-12.
- Publication 537 (2025), Installment Sales — Internal Revenue Service. Checked 2026-10-12.
- Capital gains and losses — California Franchise Tax Board. Checked 2026-10-12.
- Income Tax Folio S3-F3-C1, Replacement Property — Canada Revenue Agency. Checked 2026-10-12.
- IC72-17R6, Procedures concerning the disposition of taxable Canadian property by non-residents of Canada – Section 116 — Canada Revenue Agency. Checked 2026-10-12.
- FIRPTA withholding — Internal Revenue Service. Checked 2026-10-12.
- Publication 946 (2025), How To Depreciate Property — Internal Revenue Service. Checked 2026-10-12.
