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Not sure if this the right area for this question but here goes:
So we are going to be relocating out of state and thus selling our home this summer. We would be yielding about $60k profit from the sale of our current home which is fittingly how much I owe on my student loan debt.
We have 2 kids, mid 40's and no other debt to speak of. We will be renting for maybe 6 months at our new location as we settle in. We will both be gainfully employed at our new location with combined annual income approx 130k. Cost of living is very reasonable in the new area as well.
So would you pay off the student loan debt or use the 60k toward the new home/mortgage? We don't care about having a fancy-big home and like to live within our means (i.e. minimal debt). The issue will be saving enough for a down payment/closing costs if we use the money to pay the student loan debt.
If you know you are going to buy a home, why don't you look at homes to get an idea of what kind of down payment you might need to buy in your new area. If that is not 60k, I think I would split the use of the money - part down payment and the rest on your student loans which would at least reduce the principle considerably one would hope.
If you aren't going to buy for a while anyway, see how much you will be able to save up while renting (check the rental prices where you are going and figure that out from your known income) and see how long it would take you to save up a new down payment .. that is how long you will be renting but at least your student loans would be paid off.
I think I personally would opt for the split because I like to buy rather than rent and that way I would not have to worry about saving up again for the down payment while paying rent which may be higher than a monthly mortgage - even though I might also sleep at night knowing my student loans were gone (and that does probably free up a bit of cash too each month). That said, I doubt there is one right answer unless it is the right answer for you and your spouse and family - the one that will let YOU sleep at night and still enjoy your days.
Since you sold it at a profit, If you dump the money back into a primary residence {one YOU personally live in not one you rent out}, you WON'T have to pay capital Gains taxes on it.
If you use it to pay off student loans, You WILL have to pay capital gains taxes.
You have 1 {or maybe it's 2 years} to dump it back into a primary residence to NOT pay capital gains taxes on it.
So, I would buy a new reasonable house in your new area.
Since you sold it at a profit, If you dump the money back into a primary residence, you WON'T have to pay capital Gains taxes on it.
If you use it to pay off student, You WILL have to pay capital gains taxes.
You have 1 or 2 years to dump it back into a primary residence to NOT pay capital gains taxes on it.
So, I would buy a new reasonable house in your new area.
Good point, galaxyhi, but doesn't that depend on whether the house you sell is sold for more than - higher than the original purchase price above what - a couple can claim as an exemption? Do you have to buy a new house to claim that at all?
If you know you are going to buy a home, why don't you look at homes to get an idea of what kind of down payment you might need to buy in your new area. If that is not 60k, I think I would split the use of the money - part down payment and the rest on your student loans which would at least reduce the principle considerably one would hope.
If you aren't going to buy for a while anyway, see how much you will be able to save up while renting (check the rental prices where you are going and figure that out from your known income) and see how long it would take you to save up a new down payment .. that is how long you will be renting but at least your student loans would be paid off.
I think I personally would opt for the split because I like to buy rather than rent and that way I would not have to worry about saving up again for the down payment while paying rent which may be higher than a monthly mortgage - even though I might also sleep at night knowing my student loans were gone (and that does probably free up a bit of cash too each month). That said, I doubt there is one right answer unless it is the right answer for you and your spouse and family - the one that will let YOU sleep at night and still enjoy your days.
Thank you for the feedback. I am not sure how much of a down payment we would need. We would be buying in the 150-175k price range.
To me it sure would "feel" better to not have any more student loan debt but I am not sure of what would be best in this situation. We could have a lower mortgage with student loan debt or a higher mortgage without it.
One thing is I am pretty handy with home repair, etc so I always try to make sure the home is a good investment and it's value can be increased with some elbow grease. Of course the local housing market will always have the final say in value though.
Good point, galaxyhi, but doesn't that depend on whether the house you sell is sold for more than - higher than the original purchase price above what - a couple can claim as an exemption? Do you have to buy a new house to claim that at all?
GO to irs.gov and READ, you'll get your answer. They don't make you rush into buying a new home, that's why they give you t he year, but they want their share of capital gain, just like on stocks you sell.
GO to irs.gov and READ, you'll get your answer. They don't make you rush into buying a new home, that's why they give you t he year, but they want their share of capital gain, just like on stocks you sell.
Well that sucks then. I am going to be strapped to this student loan debt forever
So reading this tells me that one does not have to pay capital gains tax from home sale profit:
"Before the act, sellers had to roll the full value of a home sale into another home within two years in order to avoid paying capital gains tax. This, however, is no longer the case, and the proceeds of the sale can be used in any way the seller sees fit."
So reading this tells me that one does not have to pay capital gains tax from home sale profit:
"Before the act, sellers had to roll the full value of a home sale into another home within two years in order to avoid paying capital gains tax. This, however, is no longer the case, and the proceeds of the sale can be used in any way the seller sees fit."
So then I am good to use such profit to pay off other debts. What am I missing?
You're not missing a thing. You got bad information on an internet message board. Not exactly shocking.
If you've owned and lived in the house for 2 out of the last 5 years, you can sell it and exclude $250K (single) / $500K (joint return) from capital gains tax. There are some funky corner cases like vacation homes where the rules are different but not for a primary residence.
In terms of financial planning, you have to decide how stable your jobs are and how much of an emergency fund you need. Most people at that income level would bank the money as an emergency fund planning to use it as a down payment for the next house. Ally Bank will give you 1%. Better than nothing.
On a joint return, as long as your income is below $160K, you can write off school loan interest above and beyond your Schedule A itemized deductions or standard deduction. See line 33 on your Form 1040. This is a very good deal. If you have any other debt, you should probably pay that off first since you can't write off the interest.
Most people would decide to simply accelerate their student loan payments. Throw $1,000/month at it and it's gone in 5 years. Keep your nest egg intact to buy your next home and don't blow it on cars, vacations, or whatever.
If you have lived 2 years out of the last 5 years in that house as a primary residence, you won't have to pay tax on capital gain on that house up to $250K/single and $500K/couple. Depending on how much interest you have to pay on your student loan to decide how much to pay off. With low mortgage loan, and if you plan to rent for 2 years, you can qualify for first time owner again, with 5% down payment. You can borrow a second mortgage loan at a slightly higher interest rate (15%) so no pmi required. It'd be a good idea to save $15K for the house you plan to buy, and use the rest to pay off your student loan.
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