This tax-deferral plan would be a game changer for rental real estate investment
A century-old U.S. tax law provides a model for Canada as it seeks to increase housing supply and improve affordability
By Murtaza Haider and Stephen Moranis, November 3, 2026
Strategic enhancements to current tax regulations could spur more investment in the rental market and improve housing quality for renters. The existing regulations trigger capital gains taxes and depreciation recapture when rental housing changes hands. The prospect of these sudden, substantial tax bills encourages owners to hold on to properties far longer than they should, even when buildings are old and, at times, dilapidated.
If the federal government changed the tax regime so that owners could defer capital gains taxes on the sale of rental properties if the proceeds are reinvested in similar rental housing, it would attract more investment, increase the frequency of transactions and still allow the government to collect taxes once the gains are no longer reinvested in rentals.
Interestingly, this arrangement has existed in the United States for more than 100 years and is known as the 1031 rollover, named after the relevant IRS regulations. Research in the U.S. indicates that the rollover has facilitated billions of dollars in additional rental housing investment that would not otherwise have materialized. Canada should welcome new rental investment channels to maintain quality rental housing.
Renters face greater affordability burdens than homeowners and need stronger government action. Since 2020, federal incentives have boosted rental construction, helping address Canada’s decades-long shortage of purpose-built units. Yet further measures are needed to maintain aging rentals even as new housing expands the rental stock.
The 1031 tax rollover is not tax forgiveness; it is a tax-deferral system. It is subject to strict guidelines. The investor must identify a replacement “like-kind” property within 45 days of selling a rental property. The transaction must also be completed within 180 days or the exchange is disqualified. Some reports suggest that almost 30 per cent of exchanges fail, largely due to strict deadlines.
An additional safeguard is the “qualified intermediary” — a neutral third party that holds the proceeds from the relinquished property until the investor identifies and acquires a replacement. The capital gain is deferred, and the adjusted cost basis of the relinquished property carries over to the replacement property, so tax obligations remain until the investor ultimately cashes out of rental real estate.
There is no consensus on estimates of temporary revenue loss to the government from like-kind real estate exchanges in the U.S. Professors David C. Ling (University of Florida) and Milena Petrova (Syracuse University) examined the impacts of 1031 rollover transactions. They noted that the Joint Committee on Taxation estimated that like-kind exchanges may have created a static loss of US$51 billion in tax revenue from 2019 to 2023. However, Ling and Petrova estimated the total loss to be less than US$20 billion over the same period.
The median value of properties involved in such exchanges was about US$575,000, suggesting that smaller non-institutional investors used the tax deferral more. Ling and Petrova’s analysis further showed that like-kind exchanges led to higher investment, shorter holding periods and lower leverage.
A macroeconomic study by Ernst & Young (EY) found that the direct and indirect benefits of like-kind exchanges far outweigh the deferred loss in government revenue. In 2021 alone, 1031 exchanges supported 976,000 jobs and US$48.6 billion in labour income. The total value added from these transactions exceeded US$97 billion. In addition, 1031 like-kind exchanges generated US$13.1 billion in other federal, state and local tax revenues and supported US$7.5 billion in additional investment.
The tax deferral also affects the structural quality of rental buildings. As buildings age, the costs of regular wear-and-tear and replacing outdated equipment and structural elements rise. In areas with regulated rent increases, rental income may not be sufficient for landlords to keep buildings in good repair.
The 2021 Census data, recently tabulated by the CMHC, shows that a much larger share of rental buildings (7.3 per cent) require major repairs than owner-occupied housing (5.3 per cent). The CMHC report links poor structural quality to adverse health outcomes, noting that housing “requiring major repairs is roughly 13 times more likely to contain mould or mildew than housing in good condition and almost four times more likely to have pest infestations.” Improving liquidity in rental markets leads not only to better housing but also to better health for tenants in well-maintained buildings.
A recent opinion poll released before Ontario’s municipal elections found that three of the top four concerns of Torontonians were the cost of living, housing affordability, and homelessness. Since renters’ incomes lag homeowners’, improving rental affordability would provide immediate relief to an increasingly vulnerable segment of society.
