Owners of buildings with six residential units or more -- which are often rent regulated -- can demand only one month's rent as security and must put security deposits in interest-bearing accounts. Owners of smaller buildings can set their own security-deposit requirements and are not required to put the funds in interest-bearing accounts. However, Ms. Russo said, if an owner does deposit the funds in such an account, any interest earned must be paid to or credited to the tenant each year, less an administration fee of 1 percent of the amount on deposit.  One way property owners can run into trouble is by renting out an ''illegal'' apartment. Lucas A. Ferrara, a Manhattan real estate lawyer, said that if a building is classified on city records as a two-family property, and the owner adds another apartment without getting the required approval, that extra apartment would be considered illegal.  ''Everything may be fine and dandy while the tenant is paying the rent,'' Mr. Ferrara said. ''But if the tenant stops paying, the owner may be precluded from collecting the rent in court.'' He explained that under the state's Multiple Dwelling Law, a landlord could lose his right to collect rent if he leases an apartment in a multiple dwelling in violation of the building's certificate of occupancy.  Gregory Diebold, director of litigation for the Hudson County office of the Northeast New Jersey Legal Services in Jersey City, said that while New Jersey has some ''very protective legislation for tenants,'' those laws generally do not apply to two- or three-family homes occupied by their owners. Mr. Diebold noted that unless a tenant in such a building makes a specific written demand to be covered by the law regulating security deposits, for example, the law will not apply. If the tenant makes such a demand, however, the security deposit law will apply and the landlord may require a deposit of no more than one and a half months' rent and must put the money in an interest bearing account.  While the state requires registration of buildings with tenants that are not occupied by their owners -- including one-family homes that are rented out -- the requirement does not apply to owner-occupied one-, two- and three-family buildings.  Mr. Selsberg, the lawyer, said that in Connecticut property owners cannot require more than two months' rent as a security deposit (one month if the tenant is 62 or older), and must put the money into interest-bearing accounts. Finally, he said, every home and apartment in Connecticut must have a valid certificate of occupancy, including apartments in two- and three-family homes occupied by their owners. Failure to have a certificate for a rental apartment could make it difficult for an owner to use the courts to collect rent arrears from a tenant.  Joel E. Miller, a Queens tax lawyer, said that tax issues were one of the most significant aspects of being a homeowner-landlord.  When an apartment in a multifamily home is rented out, he explained, ''the building is in effect treated as if it were two separate buildings -- one held for business purposes and one for personal use.''  Using a simple example, if one apartment in a two-family house is being rented out, and both apartments are roughly the same size, then half the house would be treated as owner-occupied and the other half would be treated as a business. Since buildings used to produce income are depreciable for tax purposes, the owner is entitled to take a depreciation deduction on his tax returns. (Land is not depreciable.)  For residential property, Mr. Miller said, the business part of the building is depreciable over 27.5 years. So, if a taxpayer buys a two-family home for, say, $400,000, and the land the building is on is worth $100,000, one-half of the $300,000 value of the building is subject to depreciation at the rate of $5,454 a year. And that, Mr. Miller said, can have an impact if the house is sold.  Under federal tax law, he said, a taxpayer who owns and uses a house as his principal residence for two of the five years preceding its sale is entitled to a capital gains tax exclusion of up to $250,000. Married couples filing jointly can get an exclusion of up to $500,000.  However, any gain on the sale of a two-family house attributable to the rental part -- in our example, half the property -- does not qualify for the tax exclusion. (The gain is the difference between the sale price less expenses of the sale and the tax basis. The tax basis is the original cost plus or minus adjustments like improvements or depreciation). Since the rental part is subject to depreciation, the tax basis would be reduced by that amount, thereby increasing the taxable gain.  In fact, Mr. Miller said, this would occur even if the homeowner never claimed a depreciation deduction for the business part of the home.  ''The tax code refers to depreciation that is 'allowed or allowable,' '' Mr. Miller said. ''That means that even if the taxpayer didn't get a benefit by claiming the depreciation as a deduction over the years, the amount he could have taken reduces his tax basis and increases his gain.''
Advice on issues faced by owners of two- and three-family New York City homes who rent to tenants; drawing (M)