“Some people will say reverse mortgages are absolutely too expensive, while others will tell you they are the greatest deal on earth. What all the years of talking to seniors about reverse mortgages has taught me is that you can show somebody what something costs, but you cannot tell them what it’s worth to them,” said Ken Scholen, founder of the nonprofit National Center for Home Equity Conversion.

Seniors scrutinize costs. They preciously guard their pennies, even when they have quite a few to spend. According to a 2007 AARP survey, cost is the reason 63 percent of reverse-mortgage shoppers ultimately decided against applying for the loan. In fact, 69 percent of actual borrowers believed that reverse-mortgage costs were high, the survey revealed.

Some help is right around the corner. The Housing and Economic Recovery Act of 2008 is several hundred pages long and includes many different items that will have to be implemented during the weeks ahead. One critical item is the amount of origination fees lenders can charge on the country’s most popular reverse-mortgage program.

A reverse mortgage is a loan against a home that is not payable until the homeowner dies, sells the home, or permanently moves out of the home. Reverse mortgages allow homeowners age 62 and older to turn the equity in their home into cash without having to move, give up title or make a monthly mortgage payment. There is no minimum credit or income requirement to qualify for a reverse mortgage.

The Federal Housing Administration, a branch of the U.S. Department of Housing and Urban Development, insured 107,367 Home Equity Conversion Mortgages (HECMs) in 2007 compared with 43,131 for 2005. The HECM is the most popular reverse-mortgage program and accounts for nearly 85 percent of the reverse market.

The housing bill recently reduced the maximum fee to 2 percent on the initial $200,000 of the home’s value and 1 percent on the balance thereafter, with a cap of $6,000. Previously, HECM fees were capped at 2 percent of your home’s value or the county lending limit, whichever is lower.

The new formula for maximum origination fees will become effective concurrently with the implementation of the new HECM loan limits. The loan limits still need to be clarified. Peter Bell, president of the National Reverse Mortgage Lenders Association, said the group still does not have a definitive answer as to whether the bill establishes a single national loan limit at $417,000, or $625,500, or a sliding scale somewhere in between.

“Because one section of the bill points to another, and then the other section references prior legislation, etc., there is some confusion and variation of opinion on exactly what the language in the bill means,” Bell said. “We have had great legal minds interpreting it on our behalf and have been in constant discussion with Hill staffers and FHA. In the end, the conclusion drawn by HUD’s counsel, in consultation with congressional staff, will determine where we have come out.”

HUD expressed serious concern about companies that market reverse-mortgage products with new loan limits before HUD actually figures out what those limits might be. Companies that do so might find themselves subject to disciplinary action for false or misleading advertising, and were advised to wait until the issue is resolved before sending out any marketing information based on new loan limits.

“More seniors are recognizing that traditional retirement tools, such as IRAs, pensions and 401(k)s are not providing sufficient income to help fund everyday living expenses and healthcare,” Bell said. “Through proper education, more retirees are recognizing that the home they have lived in for so many years can now take care of them by using a reverse mortgage to access the equity accumulated over 20, 30, 40 years to help them living more comfortably.”

Reverse-mortgage proceeds can be used for any purpose, and can be taken out as a lump sum, fixed monthly payments, line of credit, or a combination. The loan amount depends on the borrower’s age, current interest rates, and the value and location of the home. A reverse mortgage does not have to be repaid until the borrower moves out of the home permanently, and the repayment amount cannot exceed the value of the home. After the loan is repaid, any remaining equity is distributed to the borrower or the borrower’s estate. A senior’s home does not have to be owned free and clear to qualify for a reverse mortgage. Reverse mortgages are often used to retire existing debt on a home.

The early reverse-mortgage programs got a poor reputation because some were flawed and contained huge appreciation shares for the lender coupled with big-time upfront fees. Now, with the federal government insuring a majority of the reverse mortgages with no lender equity shares, the concept has become more acceptable and recognized by consumers.

Thanks to the new housing bill, reverse mortgages will be less expensive to get.

If you’re selling your home, you obviously want to get it sold quickly and for the highest amount possible. One very important strategy to keep in mind is staging, which is simply the process of arranging the inside of your home so that it shows off to its full potential.

Staging plays up your home’s good features, such as enhancing a great view or drawing the buyer’s eye to some spectacular wood floors. It also helps to minimize some of the home’s drawbacks, such as making a small bedroom look larger. But also understand that staging does not in any way mean concealing structural defects, such as hanging a picture over a water stain or putting curtains over a broken window!

Staging allows a potential buyer to visualize what can be done with the home, which is especially important with a house that’s currently vacant. For example, some carefully arranged furniture in a room that would otherwise be empty can really help the buyer see the room’s potential. And if you’re in a neighborhood of tract houses that all look pretty much the same inside, good staging will set your home apart from the others for sale in the neighborhood.

Finally, good staging makes buyers feel at home. It lets them really imagine themselves in the kitchen with friends, or relaxing in front of the living room fire, or even working on their car in the garage.

Remove Clutter

There are several things that go into staging a home for sale, and probably the single most important one is getting rid of all the clutter. No one wants to see several days’ worth of mail and newspapers on the kitchen counter, or a kid’s bedroom crammed with toys and games. The same applies to the garage, basement and even the backyard storage shed.

Clutter is not just an overflowing magazine rack. It can be too many pictures on the wall, too many chairs wedged around the dining room table, or an oversized sofa that blocks the living room traffic patterns. It can be too many items of clothing crammed into a closet, or too many of grandma’s dishes filling up every inch of a kitchen cabinet.

When decluttering the house, stuffing everything into the closet or in boxes in the garage is not the answer. Remember that a potential buyer is looking in every nook and cranny of the house, and an overflowing closet doesn’t make much of an impression. Instead, get the clutter completely out of the house. This could be a garage sale, some donations to a local charity, or simply a trip to the landfill. If you still have items that are cluttering up the house but they are things you’ll want for your next home, then rent a temporary storage space and move them there.

Let Buyers Envision Themselves There

In addition to removing the clutter to make the rooms feel more open and the closets and cabinets feel more spacious, you want to always have an eye on what things you can do to help the buyers visualize living there. For example, lots of family photos on the wall will make it hard for the buyers not to feel like they’re trespassing in someone elses home.

Likewise, while you may be very proud of your religious affiliations, your choice of political ideologies, or your gun collection and the elk head on the wall, remember that not everyone shares your interests. If you can depersonalize the home to some degree, it will make it easier for potential buyers to see themselves making a life there.

Your home should also be absolutely immaculate when you have it on the market for sale. Clean the counters and the cabinets and the fixtures and the flooring and every other part of the house until it shines. Wash the windows, let in the light, and make sure that beautiful view or that inviting backyard is clearly visible when a buyer walks through. A clean house also gives potential buyers more confidence that the structure of the house has been properly maintained and cared for as well.

Hire A Professional Stager

It often makes good financial sense to hire a professional to do the staging for you. A professional home staging company will thoroughly understand the concepts of space and light and color, and they know how to make rooms show off to their full potential. They also don’t have the same personal attachment to the home and its furnishings that you do, so they can make practical, impartial suggestions that you might otherwise overlook or simply not want to face.

The cost of professional staging varies with the size of the house and amount of work involved, but a well-staged home should sell quicker and for more money, which makes that upfront expense a wise financial investment.

A consumer negotiating the terms of a mortgage with a lender or mortgage broker (henceforth “loan provider”) is in what economists term a “bilateral bargaining process.” Only two parties are involved, and the terms arrived at depend in part on their respective bargaining power.

Bargaining power is the power to influence the terms of the transaction by threatening not to do it. The bargaining power of borrowers is inseparable from the knowledge that they have it and their willingness to use it. Borrowers entering transactions with the mindset of petitioners seeking favors are not aware of having bargaining power, and as a result do not have any. They have potential bargaining power, which does them no good.

The potential bargaining power of borrowers is greatest on a refinance, because typically they have no time limit on when the money is needed. This usually means that they can break off negotiations with one loan provider and begin with another without being seriously inconvenienced.

In practice, many refinancing borrowers are solicited by loan providers and are unaware of their options. Abuses in connection with refinance solicitations were so common that Congress decided to protect refinancing borrowers by allowing them, within three days of closing, to rescind a deal with any lender other than the one holding their current mortgage. Borrowers who rescind have the right to recover all monies they have paid out in connection with the transactions.

The right of rescission is an extremely powerful tool that strengthens the potential bargaining power of refinancing borrowers. Unfortunately, most refinancing borrowers are not aware of what it does for them, and very few exercise it.

Home purchasers, at the early stages of loan shopping where they select their loan provider, have much the same bargaining power as those involved in a refinance. However, as the period to closing shortens, purchasers lose their bargaining power. They need the loan proceeds on a specific day — the day on which the contract of sale says the transaction will be consummated — and if there no longer is sufficient time to start the process again with a new loan provider, they are stuck.

Once past this point, the loan provider is in the driver’s seat. Both parties know that failure to close means loss of the house along with any deposit the purchaser has pledged. My file is stuffed with cases of home purchasers who had the mortgage terms changed on them when they were past the point of no return. Purchasers should finalize their negotiations, which means getting them down on paper, well before they reach this point.

What exactly should mortgage borrowers use their bargaining power to bargain for? In dealing with a lender, it can be anything the borrower is concerned with, but most borrowers would do well to focus on shutting down the two principal games that lenders play to improve their profit margins. One is to escalate their fixed-dollar fees, which existing rules allow them to do with impunity right up to closing. Borrowers can eliminate this game by requiring the lender to guarantee total fixed-dollar fees in writing. The total is all that matters — no fee-by-fee breakdown is necessary.

The second game is price lowballing, where lenders quote a rate and points below what they are prepared to deliver. (Points include all fees expressed as a percent of the loan amount). Because the market changes frequently, lenders cannot be held to a price until the borrower is ready to lock, which usually requires approval of the borrower’s application. When the time comes to lock, the lender raises the price to a more profitable level, explaining that that is the current market price.

To beat this game, the borrower needs to know exactly how his price will be set at the time it is locked. “We will price you at the market on that day” is a common — but not an adequate — answer because it doesn’t tell you anything you can check for yourself. “You can check the price we lock for you on our Web site” is a good answer, as they are not going to mess up their Web pricing program just to fool you.

The seven lenders I have certified as Upfront Mortgage Lenders can provide this answer, which is one of the reasons I certify them, but not many others can. If they shrug their shoulders and ask why you don’t trust them, it may be time to go to a mortgage broker.

In general, it is easier for borrowers to use their bargaining power to eliminate mortgage broker games than lender games. You need only to establish the broker’s total fee, including any fee paid to the broker by the lender, in writing. This protects the borrower against lowballing by broker or lender, and prevents fee escalation by the broker. The borrower should also require the broker to guarantee the lender fee as soon as the lender has been identified.

A court has considered whether borrowers owe taxes for the amount of debt discharged by a lender from a short sale of real estate.

George Stevens (“Taxpayer”) and his then-wife, Sharon Stevens (“Spouse”), purchased a residential property for investment purposes for $256,000. The property needed work, and so the plan was for the Stevens to put some money into the property and then either sell or rent it. The purchase was financed with a mortgage from Homecomings Financial (“Lender”).

Shortly after purchasing the property, the Stevens were unable to make a mortgage payment. In order to avoid foreclosure, the Stevens entered into a short sale agreement with a third party, with the approval of the Lender. A “short sale” occurs when the lender agrees to accept a sale price lower than the value of the loans secured by the property. The Lender imposed a number of conditions on the short sale, including limiting the amount of commissions and closing costs. The sale generated $181,461.31 in proceeds for the Lender.

Following the sale, the Lender sent the Taxpayer a Form 1099-C stating that it had canceled $74,494.96 in debt. A duplicate form was also sent to the Spouse (the couple had separated by this time). Neither the Spouse or the Taxpayer reported the discharged debt or property sale on their tax returns.

The Internal Revenue Service (“IRS”) found that the Taxpayer’s 2003 tax return had a deficiency of $21,323 and imposed penalties of $4,264 for the Taxpayer’s filing of an inaccurate return. The Taxpayer challenged this determination.

The United States Tax Court affirmed the IRS’s decision regarding the Taxpayer. In general, a taxpayer is required to include within his or her income all discharges from indebtedness. A sale of a property with a mortgage is generally treated as a sale upon which a gain or loss is realized. There are exceptions to this rule, such as when the sale resulting in the discharge of indebtedness is part of a bankruptcy case, or if the taxpayer is insolvent, or if the indebtedness is a qualified farm or business real estate debt.

While the Stevens claimed the property was for investment purposes, there was insufficient evidence for the court to evaluate whether the Taxpayer qualified for the business real estate exception. There also was insufficient evidence to determine whether the Lender intended to make a gift to the Taxpayer by forgiving the delinquency. Therefore, the court agreed that the difference between the short sale price and the loan amount, or $74,494.60, should be treated as ordinary income to both the Taxpayer and the Spouse as a discharge of indebtedness. Thus, the court upheld the IRS’s determination that the Taxpayer owed taxes on the discharge of indebtedness.

Next, the Taxpayer tried to argue that he did not owe a $4,264 penalty because he had a reasonable belief that the taxes were paid and acted in good faith, a defense a taxpayer can raise against the penalties. The Taxpayer argued that he assumed that the Spouse had paid the taxes for the discharge of indebtness because the tax bill had been mailed to her address. The court rejected this argument, as the Taxpayer acknowledged that he had also received the tax bill and there was no evidence that suggested the Spouse had paid the taxes. Therefore, the court affirmed the IRS’s imposition of a penalty.

In December 2007, President Bush signed into law the “Mortgage Forgiveness Debt Relief Act of 2007″. The new law applies to debt forgiven in 2007, 2008 or 2009. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. In most cases, eligible homeowners only need to fill out a few lines on IRS Form 982.

What is the Mortgage Forgiveness Debt Relief Act of 2007?
The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.

What does that mean?
Usually, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. The Mortgage Forgiveness Debt Relief Act of 2007 allows you to exclude certain cancelled debt on your principal residence from income.

Does the Mortgage Forgiveness Debt Relief Act of 2007 apply to all forgiven or cancelled debts?
No, the Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes.

What about refinanced homes?
Debt used to refinance your home qualifies for this exclusion, but only up to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified.

Does this provision apply for the 2007 tax year only?
It applies to qualified debt forgiven in 2007, 2008 or 2009.  If the forgiven debt is  excluded from income, do I have to report it on my tax return? Yes. The amount of debt forgiven must be reported on Form 982 and the Form 982 must be attached to your tax return.

Do I have to complete the entire Form 982?
Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness. If you are using the form only to report the exclusion of forgiveness of qualified principal residence indebtedness as the result of foreclosure on your principal residence, you only need to complete lines 1e and 2. If you kept ownership of your home and modification of the terms of your mortgage resulted in the forgiveness of qualified principal residence indebtedness, complete lines 1e, 2, and 10b.  Attach the Form 982 to your tax return.

Where can I get this form?
You can download the form at IRS.gov, or call 1-800-829-3676. If you call to order, please allow 7-10 days for delivery.

How do I know or find out how much was forgiven?
Your lender should send a Form 1099-C, Cancellation of Debt, by January 31, 2008. The amount of debt forgiven or cancelled will be shown in box 2. If this debt is all qualified principal residence indebtedness, the amount shown in box 2 will generally be the amount that you enter on lines 2 and 10b, if applicable, on Form 982.

Can I exclude debt forgiven on my second home, credit card or car loans?
Not under this provision. Only cancelled debt used to buy, build or improve your principal residence or refinance debt incurred for those purposes qualifies for this exclusion.

If part of the forgiven debt doesn’t qualify for exclusion from income under this provision, is it possible that it may qualify for exclusion under a different provision?
Yes. The forgiven debt may qualify under the “insolvency” exclusion. Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent.  A taxpayer is insolvent when his or her total liabilities exceed his or her total assets. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982.

Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?
There is no dollar limit if the principal balance of the loan was less than $2 million ($1 million if married filing separately for the tax year) at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982, page 4.

Is there anything else I need to know before filing?
Yes. Because the Mortgage Forgiveness Debt Relief Act of 2007 was passed so late in the year, the software systems used by tax preparers and at the Internal Revenue Service need to be updated to accept the revised Form 982. The IRS expects to be able to process the new Form 982 electronically on March 3, 2008.

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.