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When to Sell vs Refinance to Grow

Decision tree for choosing between selling to reinvest or refinancing to acquire

Decision invest3 min readFebruary 11, 2026
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Growing a rental real estate portfolio in Canada hinges on a fundamental strategic decision: should you sell an existing property to reinvest the proceeds, or refinance to extract accumulated equity and acquire new properties? Each option carries distinct advantages and disadvantages from tax, financial and operational perspectives. Selling frees up the full equity but triggers a taxable capital gain (with a 66.67% inclusion rate for gains exceeding $250,000 since June 2024) and potential CCA recapture. Refinancing provides access to equity without selling, preserving the rental income stream and avoiding immédiate tax impact, but it increases total debt and monthly payments. The decision tree considers several key factors: current loan-to-value ratio, remaining appreciation potential, the building's physical condition, net rental profitability, tax cost of a sale, residual borrowing capacity under OSFI criteria and the availability of attractive acquisition opportunities on the market. An AMF-certified mortgage broker can model both scenarios with detailed financial projections to guide investors toward the optimal decision.

Sell or Refinance to Grow: A Decision Tree for Real Estate Investors

Every successful real estate investor faces a pivotal moment: their property has appreciated, equity has accumulated, and acquisition opportunities are presenting themselves. The question then becomes: sell the current building to reinvest the freed capital, or refinance to extract equity and acquire without selling? This decision has profound implications for taxation, cash flow and portfolio growth trajectory.

The Selling Option: Freeing Up Capital

Selling a rental property allows you to recover all accumulated equity, including the initial contribution, mortgage principal repayment and market value appreciation. The main advantage is the immédiate availability of significant capital for reinvestment. However, selling triggers significant tax consequences in Canada.

  • Taxable capital gain: the difference between the net selling price and the adjusted cost base is a capital gain. Since June 2024, the inclusion rate is 66.67% for gains exceeding $250,000 for individuals (66.67% from the first dollar for corporations).
  • CCA recapture: if CCA was claimed, the difference between the capital cost and the UCC is added to ordinary income, taxed at the full marginal rate.
  • Disposition costs: real estate brokerage commissions (4% to 5%), notarial fees, mortgage prepayment penalty, tax adjustments and other closing costs.
  • Loss of income stream: the sold property stops generating rental income, creating a gap that must be quickly filled through reinvestment.

The Refinancing Option: Accessing Equity Without Selling

Refinancing involves replacing your current mortgage with a new, larger loan, thereby freeing a portion of accumulated equity as cash. For a rental property, lenders generally allow refinancing up to 80% of current market value. The major tax advantage is that there is no capital gain to report since the property is not sold. Furthermore, if the proceeds are used to acquire another rental property, the interest on the refinanced portion is tax-deductible.

The Decision Tree: 5 Essential Questions

  1. What is the building's physical condition?: If the building requires major capital expenditures (roof, foundation, plumbing, electrical) within the next 3 to 5 years, selling may be preferable to avoid these costs. A building in good condition with up-to-date preventive maintenance is a better refinancing candidate, as its value will be maintained or growing.
  2. What is the current net rental yield?: If the property's net rental yield is lower than what you could achieve on a new investment, selling and reinvesting may be more profitable. If the yield is solid (above 5 to 6% net cap rate), retaining and refinancing allows you to maintain a performing asset while accessing growth capital.
  3. What will the tax impact of selling be?: Calculate precisely the tax payable on a sale: capital gains (at the 66.67% inclusion rate), CCA recapture and disposition costs. Compare this tax cost to the additional interest cost of refinancing over the planned holding period. A CPA specializing in real estate taxation is essential for this analysis.
  4. What is your residual borrowing capacity?: Check your gross debt service (GDS) and total debt service (TDS) ratios to déterminé if you can take on additional debt. OSFI limits (generally 39% GDS and 44% TDS) apply. If you are close to these limits, selling may be necessary to free up borrowing capacity.
  5. Does the market present attractive acquisition opportunities?: If exceptional investment opportunities are available (below-market pricing, high-growth area, underperforming building), quick refinancing can allow you to seize the opportunity without the delay and costs of a sale. If the market is tight with no good deals, it may be better to defer any decision.

Hybrid and Alternative Strategies

It is not always necessary to choose between selling and refinancing. Hybrid strategies exist. A tax rollover under section 85 of the Income Tax Act allows transferring a property to a corporation while deferring the capital gain. A partial disposition involves selling an undivided share of the building to a partner while retaining an interest. A reverse mortgage line of credit (for older investors) allows accessing equity without monthly payments. Each strategy has its own legal and tax implications and must be analyzed with qualified professionals.

Frequently Asked Questions

When is selling preferable to refinancing?
Selling is generally preferable when the property requires costly major repairs, appreciation potential is limited, the rate of return is lower than what you could achieve elsewhere, or the capital gain is relatively small (limiting tax impact). Selling is also wise if the market is at the peak of a cycle and you anticipate a correction.
When is refinancing a commonly preferred option for growth?
Refinancing is generally preferable when the building generates good rental returns, you want to avoid capital gains tax, the interest rate is favourable, accumulated equity is sufficient to fund a new purchase, and your borrowing capacity under OSFI criteria allows it. Refinancing also preserves your existing rental income stream.
How much equity can I extract through refinancing in Canada?
For a rental property, the maximum loan-to-value ratio on refinancing is generally 80% (i.e., 20% residual equity). If your building is worth $500,000 and your mortgage balance is $300,000, you could potentially extract up to $100,000 ($500,000 x 80% - $300,000), subject to lender approval and debt ratio compliance.
Is the interest on refinancing for investment purposes tax-deductible?
Yes, if the refinancing proceeds are used to acquire an income-producing rental property, the interest on the refinanced portion is tax-deductible. It is essential to clearly trace the use of funds to justify the deduction with Revenu Québec and the CRA. Consult an accountant to ensure compliance.
How can a tax rollover help defer capital gains?
Section 85 of the Income Tax Act allows, under certain conditions, transferring a property to a corporation while deferring the capital gain. The investor receives shares of the corporation instead of cash, and the gain is only taxed when those shares are disposed of. This strategy requires careful legal and tax planning with qualified professionals.
What are the costs associated with refinancing a rental property?
Costs include appraisal fees ($500 to $3,000 depending on property type), legal and notarial fees ($1,500 to $3,000), discharge fees for the existing mortgage if changing lenders, and a potential prepayment penalty if refinancing before the current term's maturity. These costs must be integrated into the profitability analysis.

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Educational information only. This does not constitute financial advice under the Act Respecting the Distribution of Financial Products and Services (LDPSF). Consult an AMF-certified mortgage broker before making any financial decision.

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