• Some properties qualify for reduced taxes.home 3 image by Stacey Lynn Payne from Fotolia.com
  
  To encourage home-ownership, the U.S. government offers several tax incentives and exemptions established by the Internal Revenue Service (IRS). Real-estate investors benefit from tax incentives for investment properties and exchange purchases and sales. Homeowners qualify for significant tax exemptions when a home is sold, freeing up more money to purchase the next one. Conditions for tax reduction or exemption on real estate vary according to its use and length of ownership.
  
  

1031 Tax Exchange

• A 1031 exchange benefits real-estate investors.tax defined image by Christopher Walker from Fotolia.com
  
  A 1031 tax exchange, named for the IRS code section, is also known as a like-kind exchange of business or investment property. Essentially, the sale of one investment property and purchase of another is a tax-deferred transaction under a 1031 exchange. This rule applies only to investment property, not exchanges of inventory, stocks, bonds or primary residences. Like-kind properties refer to any improved property with an existing building or unimproved property, commonly known as vacant land. A like-kind exchange could involve the sale of vacant land and purchase of a residential rental property.
  
  Using this example, when the vacant land is sold, the gains are not subject to taxes if they are used within 180 days to purchase and take possession of the rental property. The money is held by a third party who facilitates the transaction and delivers it to the seller of the identified exchange property. If the rental property is sold later and another investment property is not purchased, then the taxes from the 1031 exchange are due.
  
  

Sale of Primary Residence

• Homeowners are exempt from taxes on certain gains.Sold Home For Sale Sign on Burst image by Andy Dean from Fotolia.com
  
  When homeowners sell their main home, defined as the home they live in most of the time, they can exclude up to $500,000 of the profits from taxation as a couple or $250,000 as an individual. One qualification for this tax exclusion is the ownership test: the homeowners must have owned the home for at least two years. Also, the home must have been a primary residence for at least two out of the past five years, also known as the use test. A final qualification is that the homeowners did not use this exclusion from the sale of another home during the previous two years. A formula is used to determine the adjusted basis, or starting value, of the home based on improvements and selling expenses before determining the exact amount gained from the sale of the home.
  
  

Residential Rental Property

• Becoming a landlord gives you tax advantages.handshake image by Peter Baxter from Fotolia.com
  
  Real-estate investors who become landlords receive tax advantages in the form of deductions from taxes paid on rents received. Deductible expenses include advertising, cleaning, maintenance costs, insurance, mortgage interest, legal fees, repairs, utilities, travel expenses and local taxes. Another qualified deduction is depreciation, an "annual allowance for the wear and tear, deterioration, or obsolescence of the property," according to the IRS.