Picking up stakes? Don't let the capital-gains tax blow you away

It's finally happened. You've been offered a promotion - from a junior-executive role at corporate headquarters in New York to the post of branch manager in East Podunk.

It's a big enough step up professionally that you aren't worried that East Podunk might be a little, well, quiet. And after spending what seems like years on commuter trains in and out of Manhattan, the idea of living just a few minutes' drive from work sounds heavenly.

But then something starts nagging at you. A little phrase at the back of your mind - capital gains.

Gosh, you finally realize. If I sell my house in New York, and buy the same-size place in East Podunk, for probably half the money, I'll have to pay capital-gains taxes!

Are there any strategies for minimizing the tax bite?

Yes, there are, explains Connie S. P. Chen, a certified financial planner with Chen Planning Consultants Inc. in New York.

But she suggests that before getting into what she calls the ''acrobatics'' of elaborate tax shelter or deferral strategies, you should realize that long-term capital-gains tax isn't all that terrible.

''It's only 20 percent, and that's if you're in the 50 percent marginal tax bracket, which is the highest. You may be paying much less than that.''

Moreover, any big decision like this needs to be made in light of a total financial plan, not in a vacuum. ''You always go back to the basics: net worth, liquidity, cash flow, and your tax bracket.''

If you are in a low marginal tax bracket, your best course may be to take your lumps and reinvest your gain - perhaps in a vehicle that will help you educate your children, if you have any.

If you are in a high tax bracket, Ms. Chen suggests exploring one of these strategies:

* If you're approaching, or already past, your 55th birthday, this might be the time to take advantage of the once-in-a-lifetime capital-gains exclusion of of the last five years.

* Especially if you have a low-interest loan on your current home, you might want to keep it and rent it out, then rent or buy in the new location. If you have built up considerable equity in the house you're in now, a home-equity loan might let you make the down payment on a house in the new area. ''But people shouldn't take a home-equity loan lightly,'' Ms. Chen warns.

* You might sell your home in installments, thereby spreading out the tax liability, and perhaps getting the advantage of a lower tax rate later on. This idea might appeal to the buyer, who, assuming some inflation, would make payments in cheaper dollars over time.

* You might arrange to sell the property in installments to a relative (presumably one in a lower tax bracket), who could then rent the house out and use the rental income to make the installment payments.

* If you sell at the end of the year, you might divide the sale into installments to get the capital gain in two tax years.

Like Ms. Chen, Claire S. Longden warns against ''letting the tail wag the dog'' when it comes to concern about capital-gains taxes. Ms. Longden, a certified financial planner and first vice-president in the New York office of Butcher & Singer, the brokerage, advises: ''If the taxes are going to be really horrendous - a net gain of $500,000 or $600,000, say, then you might want to try to do something - but there isn't really much you can do.''

She also observes that the Internal Revenue Service has been looking quite carefully lately at maneuvers such as installment sales. So, like Chen, she stresses the need for such a deal to be covered by a legal contract, with interest on the outstanding balance and a fair-market price for the house.

Both planners also acknowledge that financing can be tricky for an installment deal. In effect the seller - that's you - rather than a bank ends up holding the mortgage. Not everyone's cash flow can stand up to that.

''You just have to run the numbers in each case,'' says Longden. ''You have to do what's best for your total real estate investment situation.'' She cites one of her clients who recently sold property on Park Avenue to buy into a ''up and coming area'' on the West Side. The client will have to pay long-term capital-gains tax, but the West Side property appears likely to appreciate faster - albeit from a lower base - than the Park Avenue property, and so, in terms of the big picture, that is the right investment.

She points out, though, that capital gains on a house might propel one into liability for the alternative minimum tax. This occurs when so-called ''preference income,'' such as capital gains, outweighs ordinary income, such as salary. There may not be much that you can do about this. But if you realize what's coming early enough in the year, you might be able to readjust the balance by increasing ordinary income. You might take a bonus this year instead of next, for instance, or exercise certain stock options.

Harold Reichenthal, of Financial Advisers Inc. in Albany, N.Y., sees the solution to the capital-gains dilemma in pretty simple terms: upgrading. He is bullish on real estate - ''The only place they're still making (land) is in the Netherlands'' - and he suggests that if East Podunk real estate prices let you buy a bigger house, more power to you.

''Real estate is the greatest tax shelter there is,'' he adds. Because real estate gains are tax-free if you keep ''rolling over'' your gains into a bigger house each time, they are greater than the gain on other investments.

But financial planner Robert J. Martel of Lexington, Mass., doubts that you'll be able to find your dream house in East Podunk for half the price of its counterpart in the high-rent district.

''Moving provides an opportunity to upgrade your home. But the differential in housing markets is more like 20 or 25 percent at the outside.''

If real estate prices are such that you absolutely must downgrade, there's no way to avoid recognizing the gain, he adds, not even if you're in East Podunk for only a couple of years before moving back to a high-priced area. (But as long as your move is job-related, i.e., if you meet the qualifications for deducting job-related moving expenses - see IRS Form 3903 - you can ''roll over'' capital gains on the sale of a primary residence more often than once every two years, which is normally the limit.)

Mr. Martel also warns against taking advantage of the once-in-a-lifetime capital-gains exclusion simply because you are 55 or over, unless you expect to retire in East Podunk.

In calculating your capital gains, he adds, don't forget to ''do everything you can to get your cost basis up.''

That is, remember to add to the original purchase price of your home the cost of any capital improvements you've made - putting on a new roof, adding a room or a swimming pool, for example.