DEAR BOB: About four years ago I lost my job because my employer went broke. As a result, I fell behind on my credit cards and other bills. Nothing really serious, just about $3,500 of unpaid bills, but I stupidly filed bankruptcy after seeing an attorney advertising on TV. However, he failed to warn me that bankruptcy stays on my credit report for 10 years. It has made it virtually impossible for me to obtain credit.

Now I have enough for a 20 percent down payment on a home, but I can't find any mortgage lender who will make me an 80 percent home loan even though I now have an excellent job. My advice to your readers is "don't go bankrupt" because it will ruin your finances for a long time. -- Helen R.

DEAR HELEN: I'm certain you could have worked out payment programs for those $3,500 of unpaid bills so bankruptcy could have been avoided. Shame on that lawyer for helping you to file bankruptcy without disclosing the consequences it would have.

However, if you shop around, especially among mortgage brokers, you should be able to find a lender who will make you a loan. The interest rate and loan fee will be higher than for a person with a solid credit history, but with a 20 percent down payment that should be a relatively safe 80 percent loan for the lender. Perhaps you need to emphasize to lenders that you have learned your lesson and now have adequate income to make the payments.

DEAR BOB: I own a property I want to sell on a lease-option. However, I am unable to find a legal lease-option form. Please tell me where you get your forms. The real estate agents in my town don't like lease-options because they have to wait for their commissions until the buyer exercises the purchase option. -- Buck T.

DEAR BUCK: For years I have been using the lease-option forms from Professional Publishing Co., 122 Paul Dr., San Rafael, Calif. 94903. A pad of 50 forms costs about $7 including shipping. The order department can be reached at (800) 288-2006.

DEAR BOB: Recently I visited Ocean City, where I encountered a developer selling "quartershares." He claims this is far better than timeshares. Each of four owners of a condominium gets two-week intervals that rotate each year so each owner gets to use the condo different weeks each year. The $43,900 price is affordable to us. What do you think of this idea? -- Denis P.

DEAR DENIS: Not much, unless you really like to spend your vacations at Ocean City. I realize you can trade your vacation time through an exchange company, but $43,900 can buy some pretty nice vacations at other places without your being tied down to one location.

Be aware that vacation property is not a real estate investment. It is the purchase of a place to spend your vacations. As with any vacation property purchase, use only money you can afford to lose because there is no guarantee of any profit or even being able to get your investment out.

Talk to most timeshare owners and you will find there is virtually no resale market for them. It remains to be seen if there is any resale market for a one-fourth interest in a vacation condo. If you would use the quartershare regularly every year or trade some of your time for use at other resorts it might serve your purposes.

DEAR BOB: I am interested in purchasing foreclosure properties that I would repair and then sell. A neighbor suggests I could deduct the improvements from my taxes if I rent these properties and then sell them after the leases expire. What repairs, if any, qualify for income tax deductions? -- Carl W.

DEAR CARL: Repair costs for income properties, such as rental houses, qualify as deductible expenses on Schedule E, where rental income is also reported. However, if you don't rent out the property the repairs are not tax deductible and they become part of your cost basis for the house, just like capital improvements. For example, if you repair a kitchen cabinet in a rental house, the cost is a deductible repair. But if you replace the kitchen cabinet, the cost is a capital improvement that must be added to the building's cost basis and depreciated.

You can earn handsome profits either by immediately reselling the house after fixing it up or keeping it as a rental property. The basic idea of fixing up the house is to increase its market value by more than the cost of the renovation work. If you buy foreclosures at substantially below-market prices, it will be hard not to earn a profit. Consult your tax adviser for details.

DEAR BOB: In a recent article you explained how to use the "over 55 rule" $125,000 home sale tax exemption when the profit is more than $125,000 and defer the remainder of the profit tax by purchasing a replacement home costing at least as much as the "revised adjusted sales price" of $150,000. But suppose only a $130,000 replacement home is purchased. Would this trigger tax liability on the entire remainder of the sale profit? -- Mr. J.K.

DEAR MR. J.K.: No. Suppose you (1) are 55 or older on the day you sell your principal residence (2) you have owned and lived in the house at least three of the five years before the sale and (3) you have never used this tax break before. Let's pretend your principal residence sells for $275,000 and your cost was $50,000, so you have a $225,000 net profit. Subtracting the $125,000 "over 55 rule" tax exemption creates a $150,000 revised adjusted (net) sales price and a $100,000 remaining net profit that is potentially taxable.

If you buy a $130,000 replacement principal residence within 24 months before or after the sale, Internal Revenue Code 1034 says you must pay tax on $20,000 ($150,000 minus $130,000) of your remaining profit but you can defer tax on the other $80,000. This home replacement tax break is available to home sellers of any age. For details, consult your tax adviser.

DEAR BOB: Please explain "capital gains" and the changes Congress is considering. Would these new tax laws apply to all states and does the owner's age have any effect? -- Marie H.

DEAR MARIE: Everyone understands when you sell something, such as your house, for more than you paid you earn a profit. But to confuse us Congress and the IRS refer to profits as capital gains.

There are several tax law revision proposals that would tax profits from the sale of assets held for a period of time, such as one year, at lower tax rates than ordinary income tax rates. The idea is to encourage long-term investments in real estate, stocks and other assets by taxing these sale profits at lower than ordinary income tax rates. The most popular proposal would take long-term capital gains (sale profits) at a 19.6 percent tax rate instead of the 28 percent that currently applies.

But current chances of lowering the long-term capital gains tax rate appear slim even though lowering tax rates raises revenue because then more investors will sell their real estate and other major assets. Unfortunately, a few people in Congress are preventing a reduction in long-term capital gain tax rates. If lower capital gains tax rates should become law, they would apply to all states without regard to the asset owner's age.

DEAR BOB: In 1980 we purchased a house as our principal residence. We are planning to move out and rent it to tenants. Is there any law prohibiting us from doing so? Could our mortgage company object? -- Alfredo and Maria N.

DEAR ALFREDO AND MARIA: There is no law prohibiting you from converting your home from personal residence to rental status. This is not a taxable event since no sale takes place. You will need to report your rental income on Schedule E of your income tax returns, but you can also deduct applicable expenses, such as mortgage interest, property taxes, insurance, repairs and depreciation.

Your mortgage company cannot object to such a conversion. However, most mortgage lenders force new borrowers to sign a statement that they intend to occupy the home as their residence for at least six months. Such a provision does not apply to you.

DEAR BOB: Recently you answered a question from newlywed husband and wife who each own homes bought before marriage that they want to sell so they can buy one larger home together.

You said they can defer the profit tax on the sale of their two homes if they buy one replacement principal residence costing at least as much as the total sales prices of their former residences. You gave the example of one home selling for $100,000 and the other selling for $125,000, which would require joint purchase of at least a $225,000 home to defer the tax.

I find myself in a similar situation and wonder if there is a time limit for selling both old residences. We use my wife's home as our primary residence and we use mine on weekends, as it is in a resort area. -- Stephen G.

DEAR STEPHEN: I'll presume your residence was formerly your principal residence before you moved into your wife's house. If your home was always a second or vacation home and was never your principal residence, it can't qualify for the "rollover residence replacement rule" of Internal Revenue Code 1034.

This tax code section says you can defer your profit tax on the sale of your principal residence if you buy a replacement principal residence of equal or greater cost within 24 months before or after the sale of your old principal residence.

Since you can have only one principal residence and that is now your wife's house, you'd better get busy and sell your old principal residence as well as your wife's house. Consult your tax adviser to work out your sale plans.

DEAR BOB: My girlfriend told me I must have owned and lived in my home for the last five years if I am to claim that $125,000 old folks tax exemption when I sell. But I thought you told a reader only three years of ownership is required.

This is important to me because my late husband and I bought our home almost four years ago and I want to sell now because it is far too big for me. We "rolled over" almost $100,000 profit on the sale of our previous home so I can't afford to sell too soon and be stuck with a big tax bill. As I need to sell so I can enter a life-care home, is there any special law affecting my situation? -- Sadie R.

DEAR SADIE: There is so much misinformation about the "over 55 rule"

tax exemption, your letter will clarify the easy rules. First, you must be 55 or older on the day you sell your principal residence. Vacation or second homes don't qualify.

Second, you must have owned and lived in your principal residence any three of the five years before the sale. Since you bought your home almost four years ago, you qualify if you lived in it at least three of those years.

Third, you cannot use this $125,000 home sale tax exemption more than once. Incidentally, if you were married, only one exemption is allowed per married couple. It appears you qualify. The $125,000 exemption also applies to the deferred profits from the sales of previous principal residence when you used the "rollover residence replacement rule" of Internal Revenue Code 1034. Consult your tax adviser for details.

DEAR BOB: I am 25 and am anxious to make my first real estate investment. I am taking courses to become a real estate salesman although I really want to become a realty investor. I have about $20,000 to invest. Although you recommend fixer-upper houses, what do you think about my buying a condominium and renting it, since condos are lower in price than houses? -- Gregory K.

DEAR GREGORY: I do not recommend buying a condo except (1) for personal use as your residence and (2) only if you cannot afford to buy a single-family house. Condos have not proven to be as solid investments as single-family homes. Also, if you buy in the wrong condo complex there can be endless hassles with the owners' association over management problems.

My 88-year-old mother owns her condo in Minneapolis and loves it. But it is her residence. The fact that it has tripled in market value since she bought it 14 years ago is a major bonus. Her complex is professionally managed very well but the owners still have their petty arguments over what colors to redecorate the hallways.

With your $20,000, I suggest you lease-option a run-down house and renovate it for resale profit. You can probably tie up a house for $5,000 cash and spend the rest of your money fixing up the place before you exercise your purchase option when you resell at a nice profit. Or you may wish to do as I have done and lease-option a house, rent it to tenants and hope it will appreciate in market value. The best lease-option I have is for 15 years, but a one- or two-year term is more typical.

DEAR BOB: I moved into a new home about 2 1/2 years ago. The builder was quick to take our money but after we moved in he became a ghost. The construction is very poor. Cheap materials were used, and any repairs are just makeshift jobs.

My worst horror story is a weatherstripping leak under a kitchen window, causing the Formica backsplash to tear apart from the wall. The cabinets under the sink smell horribly of mildew and I cannot use them. I have complained to the builder about many other problems but to no avail.

I have a HOW (Home Owner's Warranty Corp.) warranty but when I contact them they skate around the problems and are of no help. Short of hiring an attorney to sue the builder, what can I do? -- Phylis B.

DEAR PHYLIS: You are fortunate to have a 10-year warranty from an independent third-party company such as HOW. If the builder refuses to take care of your defects, HOW is supposed to step in and correct the problems. Since you have given up on your builder, you should now focus on HOW. Get tough with them. If they don't come through, let me know.

Readers with questions should write Bruss directly at P.O. Box 6710, San Francisco, Calif. 94101.

1990, Tribune Media Services Inc.