What to do with ~150K profit

[bobertsen]

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?

[lthenderson]

I'm guessing the savings in interest by paying off the house loan more than offsets any tax savings you would loose as a pastor getting a housing allowance but you could run the numbers to be sure. At 4.25%, I would pay off the house over investing in index funds and then invest my mortgage payment in index funds from now on.

[Bearded Man]

I'm guessing the savings in interest by paying off the house loan more than offsets any tax savings you would loose as a pastor getting a housing allowance but you could run the numbers to be sure. At 4.25%, I would pay off the house over investing in index funds and then invest my mortgage payment in index funds from now on.

Really? That's pretty cheap money.

I wouldn't put more money into the house than you have to. I'd rather have a ton of cash on hand to be able to pay off the house or hold me over if I needed the money, than put more money into the house that is at risk until you pay it off.

I'd spend a hundred bucks to celebrate, save 50% of it, use 25% of it to buy a rental closer to home and put the other 25% into an index fund. The 50% you saved is good capital to take advantage of buying opportunities. Market has been flat all year, surely it will pop in the coming years.

[lthenderson]

I'm guessing the savings in interest by paying off the house loan more than offsets any tax savings you would loose as a pastor getting a housing allowance but you could run the numbers to be sure. At 4.25%, I would pay off the house over investing in index funds and then invest my mortgage payment in index funds from now on.

Really? That's pretty cheap money.

  VTSAX an S&P500 Index fund has returned 1.9% this year thus far. Chances are long term investing in an index fund will get the OP ahead of the game money wise, but if it makes them sleep better at night, and since they had to ask I'm assuming they are loosing sleep over this, I would pay off the home loan.

[Bearded Man]

I'm guessing the savings in interest by paying off the house loan more than offsets any tax savings you would loose as a pastor getting a housing allowance but you could run the numbers to be sure. At 4.25%, I would pay off the house over investing in index funds and then invest my mortgage payment in index funds from now on.

Really? That's pretty cheap money.

  VTSAX an S&P500 Index fund has returned 1.9% this year thus far. Chances are long term investing in an index fund will get the OP ahead of the game money wise, but if it makes them sleep better at night, and since they had to ask I'm assuming they are loosing sleep over this, I would pay off the home loan.

Just one year though. Other years would be different. Alas, hearing this makes me glad I bought another house last year.   My areas market is on fire still.