The new bankruptcy law that took effect on Oct. 17, 2005, included many provisions that affect both residential and commercial real estate. But attorneys are still debating whether the real estate market overall will benefit from the changes. In this three-part series, we consulted with bankruptcy and real estate law attorneys on the specifics of how the new law impacts homeowners, renters, landlords and homeowner and condo associations. But whether the real estate market overall will benefit from the changes to bankruptcy law is debatable, in part because some kinks still need to be worked out, and also because fewer bankruptcies are being filed because consumers appear to be confused about whether they can still file for bankruptcy at all.

“There was this huge rush of bankruptcy filings before the new law took effect,” said Thomas S. Linde, an attorney, who specializes in real estate law and representing creditors in bankruptcy. “But the new law turned off the water, and filings trickled down to nothing in Washington state. People aren’t aware that bankruptcy is an option for them. They think the new law closed the door to them, and that’s not true. What Congress has done is imposed more requirements to get a bankruptcy discharge. It’s more onerous, but that doesn’t mean you can’t do it.”

Robert Nelson, a bankruptcy attorney, agreed that the new bankruptcy law has complicated personal bankruptcy filings. “The volume of filing in this jurisdiction has dropped by 80 percent,” he said.

One big yet unresolved issue for homeowners is whether the new law will result in more homeowners losing their homes to foreclosure. Under the new law, homeowners who are in arrears on their mortgage can’t wait until the last minute to file for bankruptcy — as many people do — to stop foreclosure (in legalese, it’s called “staying” the foreclosure).

“Before, bankruptcy was a last-minute thing,” Linde said. “If you were in foreclosure, you could file right before the foreclosure sale,” and in some cases stop the sale, he said. “Now, if you’re on the eve of foreclosure, it may be difficult to file if you wait until the last minute.”

That’s because a new provision requires that people filing for bankruptcy must undergo credit counseling before or within five days after filing their bankruptcy petition. To show you’ve complied with that requirement, you have to file a certificate with the bankruptcy petition stating that you’ve completed an approved credit-counseling course.

According to Linde: “The policy was to see if people could qualify for something short of bankruptcy, say, could they work a deal with creditors?” The counseling isn’t onerous, he says, and can often be completed in less than an hour online or by telephone, but it still must be arranged and completed, which can create delays for homeowners who need an immediate stay from a foreclosure action.

Linde said he’d recently seen “fewer people filing for bankruptcy to stop foreclosure,” but he’s not sure if it’s because the new law is more restrictive or because there’s uncertainty over some of the new provisions, and people and their attorneys are waiting for courts to clarify those muddy provisions. Over time, however, “I think fewer foreclosures will be stopped because homeowners won’t be able to file for bankruptcy as quickly as they could before,” he said.

Duane H. Gillman, an attorney, agreed. Homeowners who wait until the last minute to try to save their homes “may be unable to conduct the credit review in time, and that may have some impact on the number of homes lost to foreclosure,” he said. Gillman has served as a Chapter 7 bankruptcy trustee since 1982, which means he’s responsible for evaluating the assets and liabilities of people who file for Chapter 7 bankruptcy and liquidating the assets to pay creditors.

Real estate agents who specialize in foreclosed properties offer mixed reports on whether changes in the law have affected their inventory. “I got more foreclosed properties assigned to me in the first quarter of 2006 than were assigned to me in all of last year,” said Alex Macau, broker associate at Keller Williams Realty. “I can confidently say the new bankruptcy law has something to do with that.”

But Chris Mann, broker-associate at RE/MAX Horizons Group, who specializes in short sales and foreclosed properties, said the new law hasn’t affected his business in any noticeable way. “My business has gone gangbusters,” he said, “but I haven’t seen the bankruptcy law play a large part in that. The problems I see are because of interest-only mortgages and because two-year ARMs are coming due, and our economy hasn’t seen the growth it did in the past. These homeowners can’t refinance because they can’t afford the refinance fee, and they can’t afford the higher payments, so they’re short-selling or they’re losing their house to foreclosure.”

Bob Hodge of Circle Real Estate Services, who specializes in foreclosures, said he’s seen a huge increase in inventory—four times the amount three years ago. He’s sure the new bankruptcy law “has a little something to do with it,” but the more likely culprits, he said, “are the large number of 100-percent loans, interest-only loans, down payment assistance programs, and the slower economy.”

But Carl Bradley, founding broker of Eagle Realtors, who’s specialized in foreclosure sales for 29 years, questions whether filing for bankruptcy has ever helped homeowners in the first place. “Filing for bankruptcy didn’t affect whether people could save their house,” he said. “It was just a stall tactic. Even though homeowners can stop the foreclosure by filing for Chapter 7 bankruptcy, the mortgage company gets released from the stay and continues the foreclosure. Homeowners have to file for Chapter 13 bankruptcy to save their house, and if they do that, then their payment becomes higher than it was before. So I don’t think the new law is going to have a long-term affect on foreclosures for people who file for bankruptcy.”

If you are getting ready to move out of your longtime home and into more sunshine, you can actually gift your home to a child or friend but that gift will come with a few strings attached.

In many countries around the world, once the parents die, the children simply move into the home and take over the master bedroom. While that progression still occurs in the United States, estate taxes, rising home values, job transfers, and the desire for a separate space and different environment have changed the use of the traditional family home.

The bottom line is that the home has evolved from basic shelter to the average person’s most valuable possession. It needs to be carefully protected, guarded, and even nursed along–much like the responsibilities that took place within the home itself. And the financial value is usually accompanied by priceless memories and experiences, making the family home beyond doubt the ultimate asset.

First and foremost, your child or friend’s basis in the house will be what you paid for the property, plus major improvements. Because this cost you paid years ago is probably much lower than today’s soaring home value, there’s a chance tax will be owed on a subsequent sale.

For example, if you purchased your home in 1970 for $60,000 and it is now worth $450,000, your child’s basis would be $60,000 if you chose to transfer the home to the child as a gift. If the married child sells the home 10 years down the road for $760,000, their tax liability would be on $200,000 ($760,000 minus the $60,000 basis, minus the $500,000 exclusion for married couples). Taxpayers in the 15 percent tax bracket would thus owe the Internal Revenue Service approximately $30,000 in capital gains tax.

The actual gain is the difference between the adjusted sales price (selling price less selling expenses) and the adjusted basis. The adjusted basis is the original cost plus capital improvements. Capital improvements are the cost of improvements having a useful life of more than one year. Examples include the new roof, dock, deck, remodeled bathroom, and finished basement. Generally, an expense is a capital improvement if it adds value to the property or extends its useful life. If these criteria are not met and the expenditure is considered necessary to maintain current usefulness, it is a maintenance cost.

The outright gift would also reduce your lifetime gift tax and estate tax exemptions. While the limits on both the lifetime gift tax and estate tax used to be the same (there was one overall exemption, and the individual used it up by making gifts during life and at death), the 2001 legislation set the gift tax and estate tax on different roads beginning in 2004. Both were combined into a “unified” exemption because gifts made during life also counted against the total. The overall, or unified, exemption remains for the entire estate, but a gift exemption limits the amount that can be given during a lifetime.

Once the unified exemption is used up, the tax rates that apply are quite high. The estate tax is being phased out over a 10-year period, but the gift tax will remain in place. The gift tax exemption is $1 million in 2006, but the estate tax leaps to $2 million. In future years, the gift tax exemption will remain at $1 million, while the estate tax exemption rises until the estate tax is fully repealed in 2010. At that time, the top gift tax rate again will equal the top income tax rate.

If you are going to gift your home to an individual, it’s best to offset the amount by first using your annual gift tax exclusion of $11,000 per gift. You can gift $11,000 (this amount will rise and is tied to inflation) to any one person in any year. Hence, if you and your spouse each make a gift to both your child and her spouse, you can offset $44,000 of the home’s value. Then, as long as the home’s net figure is less than $1 million, you won’t owe any current tax (unless you made substantial gifts earlier that reduced your remaining exemption).

Take the time to check with a tax attorney or an accountant before making any major moves. Be certain that goals are shared and discussed. You’ll find it saves time, money and anxiety.

If you are buying or selling an “as-is” residence during this peak home selling season, it is very important to understand the pros and cons of such a home sale. Thousands of houses and condos are sold “as-is” every day.

But an “as-is” sale usually isn’t the best way for a home seller to get top dollar. The reason is an “as-is” sale gives a warning signal to prospective buyers there might be something wrong with the property.

However, an “as-is” home purchase might be an incredible bargain for the buyer who understands the possible benefits and detriments.

What is an “as-as” home sale? Most of us are familiar with “as-is” used car sales. It means the seller makes no warranties or representations as to the car’s condition.

Although similar, “as-is” home sales are a bit different, thanks to state laws and court decisions.

The old days of “caveat emptor” (let the buyer beware) are long-gone in most residential sales. Today’s rule seems to have become “Home seller, beware of the buyer’s lawyer.”

When a home is sold “as-is,” that means the seller makes no warranties or representations, and will not pay for any repairs of even obvious defects. However, in most states “as-is” home sellers are now required to disclose to their buyers all known defects in the residence. The buyer can then consider these disclosed defects when making a purchase offer.

For home buyers, an “as-is” sale is a “red flag” warning to be especially careful. At a minimum, buyers of “as-is” houses and condos should make their purchase offers contingent on a satisfactory professional inspection by a reputable inspector.

Personally, I recommend members of the American Society of Home Inspectors (ASHI) because of their tough membership requirements. Local ASHI members can be located at www.ashi.com or 1-800-743-ASHI.

Why some home sellers sell “as-is.” As experienced real estate agents know, many homes are listed for sale “as-is” for a variety of reasons.

The three major reasons for selling “as-is” are 1) the seller doesn’t have the funds to correct the disclosed defects and prefers to discount the sales price instead, 2) an older fixer-upper house is likely to be renovated to the buyer’s standards, and 3) the seller doesn’t want the inconvenience and hassle of making repairs.

Additional reasons for “as-is” home sales include the seller 1) didn’t live in the house and is not familiar with its possible defects, 2) recently acquired the property by inheritance or purchase and just wants to make a quick profit, or 3) has owned the home many years and doesn’t care about getting top dollar for the property.

The unspoken reason for selling “as-is.” But there is another unspoken reason some home sellers sell “as-is.” They think they can get away with selling a home, which has a hidden defect that the buyer or a professional inspector won’t discover.

For example, a few months ago I received a letter from a nice couple who bought their first home with virtually every dollar they had. Shortly after moving in, the sewer backed up into the basement. Upon investigation, the buyers learned the sewer pipe to the street was badly broken and needed replacement. They spent about $4,750 for a new sewer line and basement cleanup.

After talking with their new neighbors, they learned the Roto-Rooter man was a frequent visitor to the house so the seller obviously knew of the problem. Unfortunately, for the buyers, the seller had moved out of the area and couldn’t be easily sued for damages.

Unless there was evidence in the basement of previous sewer backups, even the world’s greatest listing real estate agent and professional home inspector probably never would have discovered this serious defect.

Don’t reject an “as-is” home. Personally, I’ve bought many “as-is” residences for investment, which were incredible bargains. However, I always insisted on making my “as-is” purchase offers contingent upon approval of a professional inspector’s report.

To illustrate, the best “as-is” bargain I ever purchased was a house that had been rejected by dozens of other prospective buyers. As I walked into the living room and saw the ugly crack in the fireplace brick, my first reaction was “yuck.”

However, I made a very low purchase offer, contingent on the approval of a professional inspection, thinking my “low-ball” offer would be rejected. To my surprise, my offer was accepted.

Of course, I accompanied my professional inspector and asked him many questions about the fireplace, which he thoroughly inspected, even up in the attic. He reported it was just a superficial but very ugly crack, which could be repaired for about $150 with special fireplace mortar.

How to handle undisclosed home defects. Buyers of “as-is” homes should always 1) insist their sellers provide a written disclosure statement of all known defects, and 2) make their purchase offer contingent on the buyer’s approval of a professional inspector’s report. The buyer should always accompany the inspector to discuss any undisclosed defects, which are discovered.

If the inspection report reveals significant unexpected defects which, in fairness to the home seller, might have been hidden (such as attic roof leaks), the buyer then has two choices: 1) cancel the purchase and obtain an immediate refund of the good faith deposit, or 2) re-open negotiations to obtain a repair credit for the estimated cost of correcting the unexpected defect.

Many sellers are so anxious to sell their home, especially in a slow “buyer’s market,” they will gladly agree to buyer repair credits for the undisclosed defects, even if the seller was unaware of those problems.

Conclusion: For various reasons, many houses and condos are offered for sale “as-is.” That means the seller must disclose all known defects but will not pay for any repairs.

Home buyers should not automatically reject “as-is” homes. However, they should 1) insist the sellers provide a written disclosure statement of known defects, and 2) make their purchase offer contingent upon a satisfactory report by a professional home inspector. More details on “as-is” home sales are available from a local real estate attorney.

Vacation and investment home sales both set records in 2005, with the combined total of second home sales accounting for four out of 10 residential transactions, according to the National Association of Realtors®.

The annual report, based on two surveys, shows that 27.7 percent of all homes purchased in 2005 were for investment and another 12.2 percent were vacation homes. All together, there were 3.34 million second-home sales in 2005, up 16.0 percent from an upwardly revised total of 2.88 million in 2004. The market share of second homes rose from 36.0 percent of transactions in 2004 to 39.9 percent in 2005.

Vacation-home sales increased 16.9 percent last year to a record 1.02 million from a downwardly revised 872,000 in 2004, while investment-home sales rose 15.7 percent to a record 2.32 million in 2005 from an upwardly revised 2.00 million in 2004.*

David Lereah, NAR’s chief economist, said all the factors at play in the second home market were favorable in 2005. “To begin with, the baby boom generation is driving second home sales – they’re at the optimum point in life when people become interested in second homes, they’re at the peak of their earnings, interest rates remain historically low and boomers want to diversify investments,” Lereah said.

Lereah said there are significant motivational differences between vacation-home buyers and investment buyers. “Vacation-home buyers are making lifestyle choices and purchasing primarily for their own enjoyment,” he said. “Investment-home buyers are seeking rental income and portfolio diversification, although vacation-home buyers also mentioned diversification.”

In listing the reasons for purchase, 41 percent of vacation-home buyers said to use for vacations, 31 percent to use as a family retreat and 28 percent to diversify investments. For investment-home buyers, 55 percent said rental income was the primary factor for buying, and 35 percent wanted to diversify investments.

The median price of a vacation home in 2005 was $204,100, up 7.4 percent from $190,000 in 2004. The typical investment property cost $183,500 last year, up 24.0 percent from $148,000 in 2004.

NAR President Thomas M. Stevens from Vienna, Va., said not all second homes sales are necessarily a “second” home, particularly for investment buyers. “Some of these purchases may be a third, fourth or fifth investment property, showing that housing is a good investment,” said Stevens, senior vice president of NRT Inc. “The lion’s share of investment homes is actually the primary residence of a renter. Most investment owners are seasoned buyers who understand the long-term benefits of ownership, but not everybody is cut out to be a landlord.” Four percent of all homeowners hold three or more properties; 11 percent own two properties. Typical vacation-home buyers in 2005 were 52 years old, earned $82,800, and purchased a property that was a median of 197 miles from their primary residence; however, 47 percent of vacation homes were less than 100 miles and 43 percent were 500 miles or more. Investment-home buyers last year had a median age of 49, an income of $81,400, and bought a home that was close by – a median of 15 miles from their primary residence.

More than three-fourths of vacation-home buyers have no interest in renting their property, and 21 percent said it would become a primary residence on retirement compared with only 2 percent of investment buyers. Fourteen percent of investment buyers and 6 percent of vacation-home buyers purchased a property that their son or daughter can occupy while in school.

In describing characteristics that vacation home buyers value about their property, 40 percent said close to an ocean, river or lake; 34 percent close to family members; 27 percent close to preferred recreational activities; 27 percent close to their primary residence; 26 percent close to mountains; 24 percent close to a preferred vacation area; and 17 percent close to a job or school.

Activities of interest that affected the decision to buy a particular vacation home include beach, lake or water sports, cited by 37 percent of buyers; golf, 29 percent; theme parks, 18 percent; winter recreation, 16 percent; hunting or fishing, 12 percent; and boating, 9 percent. Smaller categories included gambling; biking, hiking or horseback riding; and tennis.

The largest concentration of vacation home buyers are in the Midwest, accounting for 33 percent of vacation home sales, although the property may be located in another region. Buyers in the South accounted for 30 percent of vacation home transactions, the West, 20 percent, and the Northeast, 17 percent.

Most investment home buyers are in the South – 38 percent of the total. Buyers in the Midwest and Western regions each purchased 24 percent of investment property, and the Northeast, 15 percent. One-third of vacation-home buyers and 36 percent of investment-home buyers said it was very likely that they would purchase another home, in addition to properties currently owned, within the next two years.

Lereah said it is difficult to project where the market will go in 2006. “Vacation-home sales will remain strong for the foreseeable future given the fact that baby boomers are favorably positioned in terms of affordability, as well as being at the stage in life when people are most interested in making that kind of a lifestyle purchase,” he said. “Discretionary purchases of that nature are more likely in a healthy economy, and that is looking positive as well.”

“On the other hand, investment home sales are likely to decline this year, in part because of higher interest rates,” Lereah said. “There are fewer incentives to speculate in the market with price appreciation cooling in much of the country, and more oversight is being encouraged in the mortgage market. It’s hard to say how much speculation there may be in housing, but it’s probably a single-digit percentage of total home sales.” NAR survey data shows only 2 percent of homes are sold in one year or less, but investment homes likely are under-represented in that particular reporting sample.

Lereah expects a soft landing for the housing sector in 2006 with existing-home sales declining 5.7 percent to 6.67 million, the third highest on record. “Long term, the outlook for second homes is favorable because more people will be moving into the prime years for buying a second home,” he said.

Currently, there are 36.0 million people aged 50 to 59. However, there are 45.2 million people aged 40 to 49. “That younger segment will become a driving force in the second home market over the next decade,” he said.

The second-home report is based on two surveys. One, to determine market share and to extrapolate sales data, was conducted in March 2006 of a panel of recent home buyers. That survey captured data for 3,406 home buyers in 2004 and 2005, with roughly equal samples for each year; data were weighted to correspond with demographic findings in an earlier mailed survey.

To determine median home prices, most of the demographics and buyer preferences, NAR mailed an eight-page questionnaire to a national sample of 145,000 buyers who purchased their homes between mid-2004 and mid-2005 based on county records. It generated 7,813 usable responses; the response rate was 5.4 percent. Data in this report only includes data from respondents who indicated that they purchased a vacation home or investment property.

Consumers are demanding a range of real estate products and cost options and driving the real estate industry to a new era of specialization and segmentation, according to a work group that included real estate brokers, sales associates and consultants.

The work group, formed by a National Association of Realtors committee that is composed of Realtor association executives, also reported “conflicting consumer desires” – consumers seem to want both autonomy and personalized service in real estate transactions.

“The Consumer: Catalyst of Change,” a Realtor association report released this month that is based on the work group discussions, also noted that consumers are hungry for: “convenient online services and search tools, including full information about listed properties,” “immediate responses to their online or telephone communications,” “personal, friendly service from both the agent and the real estate company,” “a smoothly integrated transaction process with effective solutions for any hurdles along the way and no surprises at closing,” “low fees and commissions or a choice of fee packages,” and “a convincing sense that the agent and broker add value to the buying (and) selling experience.”

The report also states that “retail giants like Wal-Mart or Home Depot … dominate their sectors by offering the consumer a wider selection of choices and lower prices than their competitors. And companies that fail to respond to changing consumer preferences – even once-dominant leaders like General Motors – pay the price.”

The downward pressure on industry commissions and fees is likely to accelerate, according to members of the work group who were interviewed for the report, in part because of “a huge overcapacity of real estate professionals relative to the business.”

A one-size-fits-all real estate business model appears to be going the way of the dinosaurs, the report also states, and “brokers, agents, multiple listing services … and suppliers are successfully developing and utilizing different business models.”

Changes in technology have occurred at an even faster rate than changes in consumer behavior, according to the report, and this technology has served to empower consumers and alter their demands. It remains to be seen whether the continuing impact of the Internet on the real estate industry will be evolutionary or revolutionary, the report states.

“Today, there appear to be some online companies with the potential market reach to create revolutionary change in the real estate industry.

“Consumers are comfortable using leading auction sites to buy and sell large items – including some types of real estate. Fast, user-friendly search sites have created a new perception that any information – including data on communities, neighborhoods and properties – is instantly available and free.”

While similar reports in 2001 and 2003 focused on technological innovations and alternative real estate business models as drivers for change, the latest report “focuses on the consumer as the primary driver of change,” the report states.

Other trends and likely trends that members of the work group identified: a more diverse society, a smarter consumer, a new generation of tech-savvy buyers who want instant information, more requests for one-shop real estate services, a demand for a more efficient and transparent transaction process and cost structure, increasing industry consolidation, and a more rapid response rate to consumer inquiries.

One consultant, who is quoted in the report, said, “We have always said that real estate is a local business and one that is too personal to be done over the Internet. But there will be a certain number of transactions done over the Internet – maybe even 10 percent – in the next five years.”

A veteran agent, meanwhile, said there will continue to be a demand for the traditional model of high-quality service for a commensurate commission rate.

The report on the work group discussions also noted that consumer access to property data is a key issue for MLSs. “It is a given that property data will be available to the public in some manner so the debate is on control and content. Should a local or regional MLS allow consumers to access listing information – and retain control of the process – or simply serve as a database for brokers and their agents?”

Some working group members questioned whether changing real estate market conditions could impact alternative business models, while others said that the industry would likely continue to be populated by many types of business models.

Managing Internet leads and customer relationships today are important topics for real estate professionals, as is the growth in referral fees, according to the report. “One broker noted that more than 25 percent of all transactions now have some type of referral fee attached – a trend that could have significant consequences for their long-term profitability.”

If you have turned the family den into a home office — via a complex remodel or by simple paint and wall covering — you are not alone. Since 1990, the number of telecommuters has grown at a rate of 15 percent a year mainly because of the convenience, tax and selling advantages.

In the days leading up to this year’s April 17 federal tax deadline (April 15 falls on a Saturday so the deadline is extended to the next business day) let’s check some of the reasons why working at home continues to make sense while there might be a recapture sting when you eventually sell.

It’s now relatively easy for taxpayers to deduct the cost of a home office. To qualify for a deduction, the space must be used exclusively and on a regular basis for either the entire business or its administrative and management activities.

The management provision was added in the Taxpayer Relief Act of 1997. It enables a home-office deduction to be available for any trade or business of the taxpayer as long as there is no other fixed location where the taxpayer “conducts substantial administrative or management activities of the trade or business.” The deduction is not curtailed if associates at other locations perform some management or administrative activities (such as mailings).

A home-office deduction is comprised mainly of depreciation, utilities and insurance. For example, if a home has 2,500 square feet and the detached garage, now deemed “the office,” is 250 square feet, then 10 percent of the utilities and insurance are deductible.

The actual office depreciation is 10 percent of what would be a depreciation deduction if the entire home were being depreciated for tax purposes. (Depreciation is not allowed on a typical principal residence, so the square footage allotted to “residence” would not qualify.) Supplies and other expenses directly related to the home office are fully deductible.

The area used for your home business can be depreciated using the 39-year depreciation method. The lower of your home’s adjusted cost basis or its market value on the day business use began can be the starting points.

However, all these benefits do come at a price. The tax law originally stated that if you sell your home at a gain any depreciation for a home office will have to be “recaptured.” That means that any profit on the business portion is taxable as capital gain.

On Dec. 23, 2002, the IRS issued new regulations concerning gain on home sales. As long as the home office was in the same structure and not separated from the home, only the depreciation taken for the home office after May 6, 1997, is subject to tax.

Here is the wording from the regulations:

“Taxpayers need not allocate gain between business and residential use if the business use occurred within the same dwelling unit as the residential use. They must pay tax on the gain equal to the total depreciation they took after May 6, 1997, but may exclude any additional gain on the residence, up to the maximum amount. If the business-use property was separate from the dwelling unit, they would allocate the gain and be able to exclude only the gain on the residential unit.”

In a capsule, if you bought your home for $150,000 and sold it for a net figure of $300,000, your capital gain would amount to $150,000. Because your office was in a separate and independent work shed, the business portion does not escape the new primary residence exclusions, so 10 percent, or $15,000 (the 250 square feet of office space), would be taxable.

Because depreciation can be confusing, it’s always best to consult an accountant or a tax attorney. The Internal Revenue Service’s Publication 587 “Business Use of Your Home” is accessible on the Internet at http://www.ustreas.gov.

Homes that can accommodate an office — perhaps converting an extra bedroom or garage — are becoming as desirable a selling point as any other home amenity. That’s because when potential home buyers intend to make a living from a specific space within the new home, they choose a home that meets both their living and working requirements.

While resale homes often have to be remodeled to include home-office space, many designers are helping builders with new plans that include one room that’s versatile and can be easily identified as a home office. In fact, some real estate agents say home offices sometimes help make or break a sale in a relocation situation, especially those involving double incomes and senior citizens.

Baby boomers and seniors are simply working longer. If you bring your office home, you could get hit with a recapture surprise.

EDDIE KING no longer has the moves that earned him a spot as a fullback for USC in the mid-1960s. But his ability to spot an opening and capitalize on it has earned him millions in another favorite sport — home flipping.

Over the last 30 years, King has bought, renovated and sold — or “flipped” in real estate parlance — 60 houses in Los Angeles, Hawaii and elsewhere. Most years, he’s sitting on four or five homes worth a total of more than $5 million. It’s the kind of success story that inspires daydreams of quick riches among the rest of us.

But don’t cash in that home equity just yet, warns King. Like most sports, this one isn’t kind to rookies who don’t know the rule book. “Most people who are newcomers to flipping get into it kind of like it’s an art project, and they spend too much money and try to impress their friends,” said King, 61.

Inspired by exuberant real estate pundits and late-night TV pitchmen, many homeowners who have watched prices appreciate by double digits for several years may now be convinced that home flipping is a better investment than the stock market. But advocates of the nothing-down, double-your-money-in-a-year strategy often fail to mention potential pitfalls. There are the obvious downsides — failing to budget properly and overspending on repairs — but the bigger hazards include market volatility and unforeseen tax consequences. As a result, brokers and accountants who work with flippers say that for every smart investor like King, there are dozens who lose their shirts or, worse, their savings.

“If you really know what you’re doing, you’ve got a good chance of making money,” said Mike Teer, an agent to several successful home flippers. “But if you aren’t on top of your game, you can get taken to the cleaners.”

Topping the list of pitfalls is the sheer unpredictability of the market. Bill Brame, a realtor who has flipped homes since 1989 and has several such clients, recalls how the market turned on him when he least expected it.

After starting out with just a couple of homes, the former film editor had created a virtual empire by the early ’90s. He had 14 houses going at once, with three crews of hand-picked renovators working full time to rebuild cracked foundations, repair leaky roofs, paint, plumb and generally transform fixer-uppers into top-dollar properties. Then, in 1993, the market took a dive. Unable to keep up with mortgage payments, Brame was forced to sell most of his homes at a loss and lay off his crews.

“I just overextended myself because I was having so much fun,” said Brame, a hale 78-year-old who edited the original “Star Trek” TV series and several “Star Trek” films before retiring from Hollywood to take up real estate. “Now,” he said, “I never do more than two houses at a time, because there are always things that can happen to a market, or to yourself, and you end up with two incomplete houses and no income coming in.”

Another veteran home flipper who has felt the bite of the market is Herb Rizzardini, 63, a hardware-store owner, who’s completed about 16 projects in the last 20 years. After making “decent” money buying, renovating and selling three homes, Rizzardini bought some rental properties in 1988 and then sat on them for the next 15 years.

“I bought them, and the market dipped and then it didn’t go up for 15 years,” Rizzardini recalled. “I didn’t make a cent.”

Perhaps the second-biggest issue novice flippers fail to factor in is the complicated nature of the tax system. Accountants who work with casual flippers — the weekend warriors who hear about a good deal and quickly mortgage their homes to buy another — say they often are ignorant of the tax implications of owning investment properties.

“I’m always surprised by how many people don’t know the rules,” said Michael Cain, a certified public accountant. For starters, Cain and other CPAs say that most homeowners are far from current on Internal Revenue Service regulations. For instance, in 1997, the IRS ended the so-called rollover provision, which permitted profits from a home sale to be applied to another such purchase without the seller having to pay taxes on the gain. The current law allows a seller to keep, tax-free, gains of up to $250,000 (or $500,000 for married couples filing jointly) on the sale of a primary residence if the seller has lived in it for 24 of the previous 60 months.

For investment homes — and those in which the owner did not live for at least two of the previous five years — the IRS assigns taxes according to the length of time it was owned before a sale. Profits from homes owned for two years or more are taxed as capital gains, at the current rate of 15%, plus state levies — in California, 9%. Profits from homes owned for less than two years are taxed the same as regular income, according to the bracket the seller falls into, anywhere from 25% to 35%.

The upshot is that smart home flippers follow one of three basic strategies to minimize taxes, Cain said. Most commonly, they move into a home for two years, fix it up, then sell it, claim the standard exemption for primary residences of $250,000 or $500,000 and move on to the next one. However, because this strategy only works for one home at a time, most flippers try to simultaneously own other properties long enough to qualify for the capital-gains-tax rate.

A third approach is to move the proceeds of a home sale into another investment property of roughly equal value, a procedure known as a like-kind or 1031 exchange. It could be a chicken farm or a rental house, but the exchange must be from one investment property to another, so a personal home is excluded unless it is rented out.

IRS rules give investors 45 days from the time they sell a property to identify the exchange property and 180 days to make the exchange. Investors can’t receive any cash from the sale, so all money must be held by qualified intermediaries, such as a title company.

“Occasionally, you just have to flip them before two years and pay your taxes,” King said. “But my philosophy is, you’re never going to go broke paying taxes. You do everything you can think of to not pay, but in the end you just pay them because you’ve done well and made money.”

The scenario that every savvy home flipper hopes to avoid is being labeled a “trader business” by the IRS. That title applies to those investors whom the IRS identifies as making their living off the buying and selling of homes. In that case, a flipper will not only have to pay the higher income tax rates, but he or she will also have to pay 15.3% in self-employment taxes.

“I always caution my clients about letting this become their trader business, but the truth is, there’s no rule of thumb that says: Buy three houses, you pay capital gains; buy five and you’re a trader business,” Cain said. “What’s happening is, people fall through the cracks. And every now and then someone else doing the same thing gets unlucky.”

In the end, flippers who thrive despite market fluctuations and tax rules are those who have a passion for homes and an eye for a bargain.

“I love houses and I always have,” said Brame, who paid $400,000 in 2004 for his current home and plans to put it on the market soon for $1.2 million. “I’ve always remodeled every house I’ve ever lived in because I just love remodeling. So I get to do what I love and get paid handsomely for it. What more could you ask of life?”