DEAR BOB: I read in the newspaper that in December Congress changed the rules for home mortgage interest deductions. My understanding was that on my 1987 federal income tax returns I can deduct all my home mortgage interest if my loan is for less than the price I paid for my home plus the cost of capital improvements I've added. But I read that Congress changed the law again to allow deductions for interest on home loans up to $1 million and up to $100,000 on a home equity loan. Please tell me what home mortgage interest I can deduct on my 1987 and 1988 income tax returns. -- Laurie R.
DEAR LAURIE: Welcome to the confusion club. I'll bet very few members of Congress can explain how much home mortgage interest is deductible in 1987 and 1988. You may have heard that even the IRS changed its requirements.
Originally, the IRS said all homeowners who itemize their interest deductions must fill out new IRS form 8598 for ''home mortgage interest.'' But now the IRS has revised this new tax form so most homeowners will not have to fill it out for their 1987 tax returns. The IRS says ''only'' 500,000 to 900,000 homeowners whose mortgages exceed their home's adjusted cost basis need use this form if they itemize home mortgage interest deductions. IRS Publication 932 ''New Rules for Home Mortgage Interest Deduction'' is available by calling 1-800-424-FORM.
To answer your question, the 1986 Tax Reform Act rules for home mortgage interest deductions still apply to your 1987 federal tax returns. But the new tax law Congress passed in December liberalizes the home mortgage interest deductions for the 1988 tax year.
On your 1987 federal tax returns you can deduct interest on mortgage debt secured by your first and second homes. However, if a loan made after Aug. 16, 1986, exceeds the purchase price of your home plus capital improvements added, unless the proceeds were used for medical or educational expenses, then interest on the excess over the home's adjusted cost basis is not deductible as home mortgage interest.
But on your 1988 federal tax returns you will be able to deduct interest on up to $1 million of debt used to buy or improve your first and second homes plus up to $100,000 of interest on home equity loans. This new tax law especially benefits home buyers with big mortgages. However, a special rule excludes home mortgage debt incurred before Oct. 14, 1987, from these limitations. Even when such pre-Oct. 14, 1987, debt is refinanced, the interest remains deductible.
These new tax laws for home mortgage interest deductions seem to be designed to create confusion because they are almost impossible to understand and they are different for 1987 and 1988. To add to the mess, the IRS recently issued proposed regulations for the 1987 rules which will have to be changed again for 1988 home interest deductions. Check with your tax adviser.
DEAR BOB: In October I paid off my home mortgage and now own my home free and clear. Since I received nothing from the S&L by December I phoned them and was rudely told to be patient. I then called the bank's president who had a flunky call me. She told me a ''deed of reconveyance'' was recorded to clear the mortgage from the records. When I asked for my promissory note to be returned marked ''paid in full'' she said that isn't done. In my business, every time I pay off a bank loan I receive the promissory note marked paid in full. I asked this clerk what law entitles the S&L to keep my promissory note and she only would say it is ''policy'' not to return the promissory note. How do I know that some time in the future the S&L might not say I haven't paid off my loan? -- Randall L.
EAR RANDALL: Several other readers have written about similar lender problems. Procedures vary in each state, depending on whether a mortgage or deed of trust was paid off. If the lender wants to keep your promissory note, you should insist on some proof of full payment, such as a photocopy of the note marked ''paid in full.''
Also, be sure the lender sends you the original or a copy of the recorded deed of reconveyance, mortgage satisfaction, or other document used in your state to clear the mortgage from the public records. Lenders have become very sloppy in handling mortgage payoffs, so it is up to borrowers to push lenders for proof of payment while the circumstances are fresh in everyone's mind.
DEAR BOB: We are considering listing our property for sale with a real estate agent who charges a $1,000 flat fee. The agency promises to advertise our home, fill out a contract when a buyer is found, and help arrange financing. Although the $1,000 fee is less than a normal real estate commission, I question if we should pay this ''up front fee'' without any guarantees of service. -- Patrick R.
DEAR PATRICK: Before deciding, ask the agent for references of previous home sellers. Phone those people to ask how long it took to sell the home, if they were satisfied, and if they would do business with the same firm again. Unless the firm has been in business at least several years, I would be very skeptical of any advance fee arrangement unless you have evidence the firm is highly reputable and performs its promises.
The reason most home sellers list with traditional real estate agents is these agents have to satisfy the seller or the house doesn't sell and the agent earns nothing.
DEAR BOB: In September we bought our home. It was built around 1930. The agent and seller told us the house had copper pipes. In December a basement pipe broke. The plumber said most of the pipes are copper, but the pipe that broke is galvanized. It cost us $157 for the repairs. Do you think the seller or real estate agent should pay for the repairs? -- Dean R.
DEAR DEAN: Yes. When a property seller or real estate agent makes a statement regarding a property to a prospective buyer, he has a duty not to make a misrepresentation. If such a statement later proves false, if the seller or agent knew of the misrepresentation they can be held liable for damages.
Although the $157 plumbing bill is small, the agent and seller should be held responsible for their misrepresentation. They should not have told you the pipes were copper unless they knew it to be true.
If the seller and agent refuse to pay your $157 bill, small claims court would be a good place to sue them. However, before you bring legal action I suggest you have all the plumbing evaluated. If you discover major portions of galvanized pipe, I suggest you consult your attorney about a lawsuit for misrepresentation damages.
DEAR BOB: Several times I recall you advising against purchase of condos for investment. I have an opportunity to buy up to five condos in an excellent building. The developer will sell on a lease-option and guarantee the rent with no negative cash flow for a year. With no down payment, how can I lose? -- John V.
DEAR JOHN: You are asking the wrong question. The right question to ask is how can any substantial profits be earned from condo investments? The answer is I don't know.
Many people, including myself, have tried to figure out how to make money off condo investing. I have yet to hear from any reader who has become rich investing in condos. However, I know many investors who have become millionaires investing in single-family houses, apartments, commercial buildings, and industrial property.
The condo developer is obviously trying to unload. He probably read my book ''The Smart Investor's Guide to Real Esate'' in which I suggest the best way to sell virtually any property is to lease it with an option to buy.
Many condo owners are desperate to sell since most cities have a glut of unsold condos. However, condos can be wonderful personal residences. My mother enjoys her condo very much because it is the ideal place for her to live. But rental condos usually do not command high enough rent to pay all expenses plus the mortgage payment, so they make poor investments. I cannot advise strongly enough that you stay away from condo investments.
DEAR BOB: We have about $50,000 equity in our home. Our only other assets are around $25,000 in a vested company retirement plan, $14,000 in CDs, and about $10,000 of common stocks in solid companies. My best friend has done very well by purchasing one rental house each year. He now has 12. Do you think we should borrow perhaps $10,000 or $15,000 of our home equity to use as a down payment to buy one or two rental houses? -- Ron R.
DEAR RON: Yes. Your home appears to be your best investment. Why not own several more? Since I switched from apartment buildings to single-family rental houses several years ago, I've found they are much easier to buy, finance, manage and sell.
When you have a collection of five to 10 houses, you'll then have great financial flexibility to periodically refinance (tax-free), buy more or enjoy sale profits. The tax benefits are not as great as before the 1986 Tax Reform Act but they are still good enough to shelter your rental income and possibly some of your ordinary income such as job salary. This is a great year to get started on a profitable real estate investment program.
Readers with questions should write Bruss directly at P.O. Box 6710, San Francisco, Calif., 94101.