I'm in the process of selling a piece of real estate that I own out of state. It's become difficult to manage from a distance and the value has finally come back up from its popped bubble low. The property is in Southern California, and I'm currently living in Ohio. Since we moved out of the property less than 3 years ago, I'm fairly certain the sale still qualifies for the 'primary residence' capital gains exclusion.
The gain on the sale is about 150K. I'm trying to figure out my best method for using it.
The options I'm pondering:
1. Sink the gain into my current mortgage balance to pay it off next year (current balance ~167K at 4.25%). I have no other debt besides a student loan (~8K at 1.75%).
2. Invest in index funds.
3. Invest in local real estate.
The risk averse side of me leans toward option #1, however, my wife is a pastor. Thus, her income is taxed as a self-employed person (she pays both portions of FICA). To balance this, pastors are able to declare a housing allowance which exempts the portion of their income that is devoted to housing expenses from federal income taxes.
In other words, if I listen to the risk averse voice in my head, I'd be paying down a low interest loan at the expense of possible higher gains following strategies 2 or 3 while at the same time I'd pay higher income taxes at the marginal rate on the mortgage interest deduction plus the full pastor's housing allowance.
Advice?