The Housing and Economic Recovery Act doesn’t only stave off foreclosures and help troubled lenders. First-time buyers, older homeowners and others also benefit.

Tax breaks for owning real estate are undergoing another shift, thanks to the Housing and Economic Recovery Act recently signed into law by President Bush.

The main focus of the bill was on its provisions to stave off foreclosures and to bail out mortgage giants Freddie Mac and Fannie Mae. But there are also measures of interest to people with vacation homes, first-time home buyers or those planning to buy a home who haven’t owned one in three years, and homeowners who don’t itemize their federal tax returns.

Here’s a rundown:

Vacation Homes –

The housing bill closes a provision that some people with vacation homes had used to avoid paying tax on the appreciation realized on their vacation properties when they sell.

You might wonder: What does this have to do with solving the housing crisis? Nothing, really; it is designed to raise revenue and help pay for the other tax breaks in the bill.

The provision has allowed someone with a vacation home to get a tax break, providing he or she is willing to live in it for at least two years before selling it.

Under current law, taxpayers can exclude up to $250,000 per person, or $500,000 per couple, in gains on the sale of a personal residence from federal tax.

Because tax law defines a personal residence as the place where the taxpayer has lived for two of the last five years, people with vacation homes can move in for two years, sell the home and then move back to their primary residence.

But starting Jan. 1, 2009, taxpayers can exclude only the portion of the gain that corresponds to the “qualified use” of the home. That means the taxpayer will have to divide the number of years lived in the residence by the number of years it was owned to figure out what percentage of the gain is tax-free, said Mark Luscombe, principal tax analyst with CCH Inc., a Riverwoods, Ill.-based publisher of tax information.

Here’s an example: If you bought the house in 2009 and owned it for 10 years but lived in it for just two, only two-tenths of the gain would be tax-free.

Even if the home appreciated in uneven fashion (as homes often do), the tax law says you have to act as if the appreciation was earned evenly throughout the time period that you owned it.

The good news is that Congress also put in a generous transition period, he said. Only the period following the law’s 2009 start date will count in the “non-qualified use” portion of the home-sale calculation.

So if you bought the house in 2000 and moved into it in 2010, selling in 2012, you would pay tax on only two years of appreciation after the law’s start date but before you moved in — the non-qualified use in 2009 and 2010.

That makes it time to get packing, said Bob Scharin, senior tax analyst with the tax and accounting business of Thomson Reuters, about the change: “If you move in before the end of 2008, the law will not affect you at all,” he said.

A ‘credit’ you must repay –

The housing act also ushered in two new tax breaks for homeowners.

The most widely touted was one that provides a tax “credit” of $7,500 for couples and $3,750 for married couples filing separately for first-time home buyers. But the credit is really an interest-free loan, not a credit in the traditional sense of the word, Luscombe said. It must be paid back in equal installments over a 15-year period.

Saying the credit is for first-time home buyers is also a misnomer. Anyone who hasn’t owned a home for three years before purchasing the home can qualify.

Before that “look-back period,” they could have been Donald Trump and it still wouldn’t matter.

“You could have owned many homes in your lifetime, as long as you didn’t own a home in the three-year period prior to the purchase of the home to which the credit will apply,” Scharin said.

There are income limits, however. Only singles earning less than $75,000 annually and married couples earning less than $150,000 annually can claim the full credit.

Once income exceeds those thresholds, the maximum credit is reduced until it is eliminated for singles earning $95,000 and married couples with $170,000 or more in income.

The credit is also temporary. It is available only for homes purchased April 9, 2008 through July 1, 2009.

One-time deduction –

There are fewer strings attached to a new tax deduction for homeowners who don’t itemize deductions. The tax law gives non-itemizers a write-off to compensate them for any state and local real estate taxes they pay. The deduction is the lesser of the amount of that tax, or $500 for single filers or $1,000 for married couples.

But this deduction is available for only one year — 2008.

This deduction is aimed at helping older homeowners, who may have already paid off their mortgages and thus don’t have enough deductible expenses to itemize. It is meant to help them through today’s tough economy.

It’s always wise for would-be home buyers to make sure that the builders they choose are on solid footing. But at a time when many companies are teetering on the brink of financial ruin, it’s necessary to be as picky about the builder as the floor plans and options he offers.

There already have been 35 “major” implosions and 27 “tiny” ones among the building community, according to the Home Builder Implode-o-Meter. And the website has 15 builders on its “ailing” watch list, including some of the biggest names in the business.

The website’s roll call of fallen firms is somewhat subjective because the companies on it may not have shut down operations altogether. Some have filed for bankruptcy protection, while others may still be running but have gone through some sort of adverse change.

Whatever the case, when a builder becomes crippled, his buyers usually go down with him. Current customers often lose their deposit money or end up with a partially completed house. Recent buyers who have already moved in could be left with no one to come back to fix the numerous items that invariably require attention.

It’s not always easy to check on a builder’s financial stability, but you need to protect yourself. So it behooves you to do some investigating to make sure that the builder will not only be around to finish your house but also to take care of warranty items that may pop up after you take occupancy.

There isn’t any precise way to research your builder’s staying power, but here are some steps you can take to avoid a sinking ship:

* Check with your local courthouse to see if any of the subcontractors and material suppliers have filed liens against the builder because they have not been paid. It’s not uncommon for a builder to use his cash to meet his own payroll before paying any or all of the 120 or so vendors who work on a house, hoping he can use cash from the next sale that comes through the door to pay for the work and materials on the previous sale.

Subcontractors and suppliers often let a builder slide because they want to keep working too — but only for so long. When it becomes evident to them that the company is in dire straits, they file liens against the builder so they’ll be in the line of creditors should the builder file for bankruptcy.

* Require the builder to provide lien releases signed by every vendor on the job saying they have been paid. This could be a logistical nightmare for the builder, but if he wants your business, he may agree. Sales are hard to come by these days, so a builder who is in good shape may agree to do this just to ease your concerns.

* Ask for permission to speak with the builder’s bank about his financial strength. Lenders are often the last to know when a builder is in trouble. Still, a builder who balks at your request may be trying to hide his difficulties. But a sound company shouldn’t have any problem with this request. If the builder does agree, the bank has a duty to be honest. If not, it could be held liable if the builder folds.

* Demand that your deposit money be held in a separate escrow account. In most states, builders are permitted to place earnest money into their own accounts and use the funds to operate their businesses. But in today’s market, some will use your money to finish the previous buyer’s house, hoping to use the next buyer’s money to work on yours. Builders may balk at first, but if it means the difference between a sale and no sale, they should cave.

* Ask for the names of the company’s most recent buyers to get their take on the builder. One of the first costs a builder in trouble will cut is warranty work, so you’ll want to know whether the company is attending to so-called “punch list” items in a timely manner. Also ask if the builder cut corners, switched suppliers in midstream without notice or permission, or has generally failed to be responsive.

* Add a “springing” provision to the sales contract. This is a clause that allows you to back out of the deal if the builder files for bankruptcy. Builders typically won’t let a buyer amend their standard contracts. But today’s housing market calls for extraordinary measures, so a sound builder shouldn’t have any trouble with this consumer protection.

* Another place builders tend to cut early is office personnel. If the company lays off construction staff, it could simply be phasing down to get in step with the slowing market. But if there is no one to answer the phone, trouble may be brewing. Ditto if the builder has canned project superintendents, estimators or design, sales and marketing staff. These are all “lifeline” positions, so if these key personnel slots are vacant, buyer beware.

* Consider taking out a construction loan, one that automatically switches to a permanent mortgage when the house is completed, in your name. That way, the builder will be paid in draws only as various phases of construction are completed. If the builder fails, you’ll be left with a partially completed house that probably will cost you more to finish than you planned to spend. But at least the place will be yours. You won’t lose your deposit, and your house won’t be tied up in legal proceedings.

* Make sure that the builder offers a third-party warranty. This won’t protect you if the business goes under while the house is under construction. But if the builder goes belly up after you move in, the warranty company should step forward to make repairs. Many builders have their own one-year warranties. But they aren’t worth a hoot if the builder is no longer around to back them up.

Deep in the nearly 700 pages of the new housing bill just signed into law is a complicated tax code change that could affect substantial numbers of people who purchase second homes or rental investment real estate in the coming decade with an eye to occupying them as their main residence later.

The law narrows the use of the code’s tax-free exclusion that allows sellers of principal residences to escape taxation on the first $500,000 of their profit (married joint-filers) or $250,000 (single-filers). Under current law, sellers can claim the full exclusion if they have used a property as their principal residence for at least two of the five years preceding a sale.

They can also claim the exclusion even if they convert an investment property or vacation house into their principal residence and live there for at least two years. This flexibility has been a boon to many tax-wise owners of multiple houses — particularly during the bubble years when values doubled in some parts of the country.

Property owners in markets with high appreciation rates could sell their principal residences for a hefty profit — pocketing the first $250,000 or $500,000 tax-free — and then move into their rental condo or vacation property for a couple of years and repeat the process.

It was a form of financial alchemy where taxable profits could be transmuted into tax-free gains — at least up to the $250,000 and $500,000 limits.

That practice caught the eye of tax reformers on Capitol Hill. Last year the House approved a bill that would ratchet down the rules on such transactions by distinguishing between “nonqualified” periods of rental or investment use and “qualified” periods of principal residence use. It resurfaced this year in the housing bill as a “revenue offset” — a way to raise an extra $1.4 billion over the next decade.

Here’s how the new rule is expected to work: If you buy a second home or investment property on or after Jan. 1, convert it later into your principal residence and then sell, you’ll need to allocate any gain from the sale between periods of qualified and nonqualified usage. Rental or second-home usage before 2009 is grandfathered — it won’t count as nonqualified use in the equation.

The minimum period for qualified principal residence use will remain two years out of the five preceding the sale. Any nonqualified use will have to be toted up to limit the amount of the tax-free exclusion you are allowed.

Sellers in future years will need to create a fraction against which to multiply their total gain. The numerator (top number) will be the time period the house was used as something other than a principal residence. The denominator (lower number) will be the total period of ownership.

The congressional Joint Tax Committee prepared an example to illustrate how the computation would function.

Say you are a single taxpayer and you buy a house next Jan. 1 for $400,000. You rent it out for two years and write off $20,000 in depreciation deductions. Then on Jan. 1, 2011, you convert the rental house into your principal residence. You live there for two years. On Jan. 1, 2013, you move out and put the place up for sale. On Jan. 1, 2014, you complete the sale of the house for $700,000.

As under current law, the $20,000 of depreciation write-offs is treated as gross income. The two years of use as a principal residence qualifies you for some amount of tax-free exclusion on the $300,000 gain. But how much?

To figure it out, you divide your aggregate period of nonqualified use (the two rental years) by your total period of ownership (five years) and multiply that fraction (two-fifths or 40%) against your gain of $300,000. The resulting number is the amount that’s subject to capital gains taxation — $120,000 in this case. The remaining $180,000 is tax-free.

Bottom line: If you plan to buy, reside in or sell a second home or rental investment property after Jan. 1, be aware of the new allocation formula. And talk to a tax advisor before making any big moves.

Anyone who’s been sitting on the sidelines hesitant to jump into the housing market until conditions settle down should know these dates: April 9, 2008, through June 30, 2009.

They mark the eligibility period for the home purchase tax credit created by the housing bill enacted last week. If you have not owned a house during the last three years — or are considering buying a first home — and you close on a purchase before the end of next June, you may be eligible for a credit of as much as $7,500 against your federal taxes for 2008 or 2009 ($3,750 if you file taxes as a single person).

The new tax credit is expected to benefit hundreds of thousands of buyers. Here’s an overview of the specifics.

* The basic idea: To jump-start housing sales and clear out stocks of unsold real estate, Congress is offering tax credits to encourage new purchasers. Buy any house — new, old, in any location or condition for any price — within the designated time period and the IRS will cut as much as $7,500 off your tax bill this year or next.

For example, if you’re an eligible buyer of a home this year and you owe the IRS $4,000 on your total 2008 income tax bill, your $7,500 tax credit could wipe out everything you owe plus get you a $3,500 refund.

* Eligibility rules: If you own a home now, you’re not eligible. If you sold your home more than three years ago and now rent, you are eligible. The same is true if you’ve never owned a home. Close on a house before next June 30 and you can claim a credit of up to 10% of the purchase price to a maximum of $7,500.

If your adjusted gross income exceeds $150,000 ($75,000 for singles), the credit maximum begins to phase down. You cannot claim the credit if you financed the property using a state or local housing agency’s tax-exempt bond mortgage, or do not plan to use the house as your principal residence.

* Payback: Unlike some past tax credits, this one must be repaid over an extended period. Starting in the second tax year after purchase and continuing for up to 15 years, taxpayers are expected to make pro-rata repayments to the government on their federal filings. Over a 15-year payback period for the full $7,500 credit, the cost would be $500 a year.

If you sell the house before the end of the repayment period, and you have no gain on the sale, you won’t be expected to repay the remainder of the credit from the proceeds. If you have a net gain, the “recapture” cannot exceed the amount of your gain. In other words, the federal government is taking on all or much of the risk that the value of your new house won’t increase over time.

At its core, the new tax credit works very much like an interest-free loan. You pay the principal back in increments over time, but there’s no interest charge to you.

Rob Dietz, an economist for the National Assn. of Home Builders, says the credit not only will pull first-time buyers into the market but also will have a powerful “multiplier effect” as thousands of sellers of these credit-assisted houses go out and purchase replacement homes for themselves — extending the effect of the credit into the move-up segment.

How do you claim the credit? If you qualify, you simply request the credit on your tax return for either 2008 or 2009, which will be modified for that purpose.

Even if you purchase in 2009, you can take the credit against your 2008 taxes by filing an amended return. The home builders group is launching an educational website, at www.federalhousingtaxcredit.com, with additional information for consumers.

It’s not uncommon for home buyers to talk with several mortgage brokers or lenders to compare loan products and interest rates. One buyer who shopped around was scolded by a mortgage broker when he found out she was talking to more than one broker. He told her that she was ruining her credit score by allowing multiple credit inquiries.

Too many credit inquiries can negatively affect your credit score, but you can control the damage. And, credit inquires make up a relatively small part of your credit score.

For example, the FICO credit score from Fair Isaac Corp. that is widely used by mortgage companies for qualifying borrowers uses five types of information to calculate a credit score. Each type counts as a percentage of the total credit score. They are: payment history (35 percent); amounts owed (30 percent); length of credit history (15 percent); new credit (10 percent); and types of credit in use (10 percent). Credit inquiries fall into the “new credit” category, which accounts for less than 10 percent of your credit score.

Only voluntary inquiries are taken into account, such as the inquiries made at your request when you shop loan rates. Loan agents usually need to know your credit score before they can quote you an interest rate.

The FICO credit-scoring model ignores all mortgage inquiries made within the last 30 days, so they will have no impact on your credit score. An older version of the scoring formula uses a 14-day time span. A newer version uses 45 days. The lender decides which version of the scoring model it wants to use.

There’s no need to panic if you don’t line up your mortgage in 30 days. The scoring formula looks for mortgage inquiries older than 30 days. It counts all the mortgage inquiries within a certain period, which varies depending on the scoring model used, as one inquiry. For some borrowers, one inquiry might not affect their credit score at all. If it did, it should be less than five points off your score.

Let’s say you talked to four lenders during a week in May. You authorized each to check your credit. Then you postponed buying until August, when you shopped rates again within 30 days prior to closing the sale. The most recent credit inquiries wouldn’t affect your credit score. The four that were made in May would count as one inquiry.

HOUSE HUNTING TIP: Interest rates moved up about 0.25 percent during the week of June 9, 2008. And, there’s a wide range of rates being quoted. This is a time when it could pay off to shop carefully for the best rate and mortgage product to suit your needs.

For example, on June 16, one mortgage broker quoted 6.75 percent on a conforming loan (to $417,000) for a 5-year, interest-only, adjustable-rate mortgage (ARM) with no points. (One point — a loan origination fee — is equal to 1 percent of the mortgage amount). Another broker offered a 5-year ARM that is fixed for the first five years at 5 7/8 percent with no points. And, this rate was available for loan amounts up to $650,000.

Nonconforming jumbo financing for mortgage amounts over $1 million is still high — in the 8 to 9 percent range. Some buyers are achieving a lower blended rate by combining a conforming jumbo (to $729,750) with a second loan. Borrowers who have good credit and an established banking relationship with a lender might be able to arrange a preferential rate.

Before you authorize a credit check, find out what kinds of mortgage products a lender offers and provide a brief summary of your financial situation. Try to focus your rate shopping within a 30-day time period.

THE CLOSING: Don’t authorize a credit check until you’ve narrowed your search down to likely prospects.

U.S. home sales to international buyers appear to have subsided in the past year, according to a National Association of Realtors study released today.

The survey of 4,000 Realtors found that about 26 percent of participants worked with at least one foreign client from May 2007 to May 2008, down from 32 percent in the previous survey, conducted from April 2006 to April 2007.

“The decline in foreign home buying could reflect the general downturn in the U.S. housing markets. Foreign buyers — like U.S. buyers — may be waiting for home prices to continue to decline in order to purchase a property at a lower price,” the report suggests. “Some foreign buyers may be reticent to invest in a U.S. property until they are assured that their investment will ‘pay off.’ ”

Among those survey participants whose international clients successfully purchased homes in the United States, about 8.2 percent reported that these transactions represented the bulk of their business. That compares with 7 percent in the study released last year.

In the latest survey, 21.3 percent of respondents reported an increase in international business in the past five years, while 72.3 percent reported that the level remained constant and 6.4 percent reported a decrease in international business. In the 2007 survey, about two-thirds of participants reported that their international clientele accounted for about the same level of business during the previous five years while about 25 percent reported an increase.

Sale transactions with international clients represented a median 16 percent of overall business for those 2008 survey participants who completed at least one sale to an international buyer during the latest survey period.

Foreign or international buyers are defined as those who principally reside outside of the United States and are not classified as a foreign-born resident of the Unites States, according to the study.

The most common countries of origin for foreign buyers were much the same in the latest study as they were in the previous study, though with different proportions.

The share of buyers from Canada and Mexico grew from 23.4 percent of foreign buyers in the 2007 study to 32.7 percent in the latest study, while the share of European buyers shrank slightly — from 32.9 percent in the 2007 study to 31 percent in the latest study.

The share of Asian buyers shrank from 23.6 percent in the 2007 study to 22.4 percent in the 2008 study, and the share of Latin American buyers fell from 15.6 percent in the 2007 study to 9.8 percent in the latest study.

About 23.6 percent of foreign buyers were from Canada in the latest study, which was nearly double the number in the 2007 study. United Kingdom was next on the list at 12.5 percent, followed by Mexico at 8.7 percent, China at 7.5 percent, India at 6 percent, and Germany at 4.5 percent.

Mexico accounted for the largest share of foreign buyers in last year’s study, at 13 percent, followed by the United Kingdom at 12 percent, Canada at 11 percent, India at 6 percent and China at 5 percent.

In the 2008 study, about three-fourths (75.2 percent) of foreign buyers purchased single-family homes, with 19.2 percent purchasing condominiums or apartments and 6 percent purchasing town homes.

Buyers from Mexico had the highest share of single-family home purchases (at 91.8 percent) and the lowest share of condo/apartment purchases (at 2 percent) among the top six countries of origin for foreign buyers of U.S. property.

Meanwhile, buyers from Canada had the highest share of condo/apartment purchases (31.9 percent) and the lowest share of single-family home purchases (65.2 percent) and town home purchases (3 percent). Buyers from China had the highest share of town home purchases (14 percent).

About 46.8 percent of international property purchases in the United States were in the South, 30 percent were in the West, 12.9 percent were in the Northeast and 10.3 percent were in the West. Buyers from Europe made purchases predominantly in the West (47.6 percent) and in the South (42.9 percent), buyers from Europe were most likely to purchase in the South (55.6 percent), and buyers from Asia were most likely to purchase property in the West (37.4 percent) and in the South (31.3 percent).

Florida was by far the top destination among U.S. states for international buyers, drawing 25.4 percent of all sales to foreign buyers. California was next at 8.9 percent, followed by Arizona at 8.7 percent and Texas at 6.8 percent.

About 38.7 percent of Florida Realtors participating in the survey reported that they had no international clients, compared with 53 percent in Arizona, 69.8 percent in California and 74 percent of respondents in Texas.

Florida was a preferred destination for home sales by foreign buyers from North American (Canada and Mexico), Europe and Latin America, while California was the top choice for buyers from Asia. Buyers from China were most likely to buy in California, while buyers from Mexico were most likely to buy in Texas. Buyers from Canada, the United Kingdom and Germany were most likely to buy in Florida.

The median price foreign buyers paid for a U.S. home was $297,400, according to the survey, which far exceeds the U.S. median sales price of $217,900 in 2007. About half (50.6 percent) of foreign buyers paid $300,000 or less for a U.S. home, with 8.6 percent paying more than $1 million.

Buyers from Mexico were most likely to pay under $200,000 for a U.S. home (60.8 percent), while buyers from China were most likely to pay more than $1 million (14 percent). Likewise, the median price paid by buyers from China was the highest among the top six countries of origin ($450,000), while the median price paid by buyers from Mexico was the lowest among these nations ($164,500).

About 42.7 percent of foreign buyers paid all cash for the homes, according to the latest survey, compared with a 28 percent share of all-cash buyers in the previous year’s study. Buyers from Canada were most likely to pay all cash (69 percent) and buyers from India were least likely to pay all cash (23 percent).

About 55 percent of survey participants reported that the weak U.S. dollar had little or no impact on home sales to foreign buyers, while 38 percent reported a “significant impact.”

The primary purpose of the U.S. property purchase by foreign buyers was as a vacation home for family and friends (55 percent), with 13.4 percent reporting that the primary purpose was to acquire a rental property for investment, and 31.6 percent reported that the property served both functions.

Buyers from India were most likely to purchase properties primarily as rental properties for investment (24 percent), though this accounted for the smallest share of buyers from Germany (4 percent). Buyers from Canada were most likely to purchase a property as a vacation home (64.4 percent), and this was the least likely primary reason of purchase for buyers from India (16 percent).

On average, foreign buyers plan to stay in their U.S. property for 2.6 months of the year, according to the survey of Realtors who worked with the buyers.

About one-quarter of survey participants reported that they had international clients from May 2007 to May 2008 but were unable to close a real estate transaction with them, and they cited the property cost (54.1 percent), immigration laws that prevent foreigners from living in the U.S. continuously (27.4 percent), property taxes (24.2 percent) to U.S. tax laws (17.4 percent), insurance cost (12 percent) and loss of home country benefits (4.3 percent) as reasons that their clients did not end up buying a U.S. home.

Property costs in Arizona and California were a major perceived impediment to prospective foreign buyers, as were property taxes in Florida and Texas, insurance costs in Florida, and exposure to U.S. tax laws in Arizona and Texas.

The report also notes that the availability of mortgage financing — which has presented major obstacles for many domestic buyers — is even more troublesome for international buyers. “For international buyers, banks may require higher down payments than those for U.S. buyers — 30 percent or even higher. In addition, a tightening of U.S.-based credit requirements means that complete documentation is more of a necessity.” Even if foreign buyers do make a higher down payment, “banks and title companies require extensive documentation of income and financial health; these entities may have difficulties verifying foreign sources of this type of information.”

And language and cultural barriers can also complicate real estate transactions, respondents reported.

And while not addressed in the survey, the continuing housing slowdown, ongoing violent conflicts around the globe and high oil costs can also contribute to the uncertainty of foreign buyers. “One possibility is that potential foreign buyers may still be ‘on the fence’ — as are many domestic buyers — waiting for the housing market to bottom out,” the report states.