I’m Fearful for the Future and Want to Do Something Specific With Our Cash. My Husband Has Other Plans.

Pay Dirt Photo illustration by Slate. Photo by Srdjanns74/iStock/Getty Images Plus. Pay Dirt is Slate’s money advice column. Have a question? Send it to Kristin and Ilyce here. (It’s anonymous!) Dear Pay Dirt, We recently sold an investment property and made $175,000 in profit. Currently it’s just sitting on our regular savings account. My husband and I can’t agree on what we should do with this money. I grew up very financially unstable and tend to hoard cash. With things in the country being so volatile, I am even more inclined to hold on to our cash in case we need to bug out (I recently obtained my Irish citizenship). My husband wants to pay off my federal student loans that run us about $900 a month. But I also understand that we need to do what we can to make our current lives comfortable. Half of my student loans (about $40,000) are 6 percent and the other half (about $20,000) are under 4percnet. Should we just pay off our credit cards and the higher interest loans, ask the lender to re-cast my payments on the remaining loans and save the rest of the cash or just pay everything off? Paying everything off would still leave us with a good chunk of savings. —Financially Fearful Dear Financially Fearful, Before you decide where that $175,000 goes, let’s make sure how much money you actually have to play around with. Because if you haven’t set aside cash for taxes, a significant chunk of it belongs to the IRS. Selling an investment property usually triggers two taxable events unless you do a 1031 tax free exchange (which allows the investor to defer capital gains taxes owed). The gain attributable to depreciation is taxed at up to 25 percent as unrecaptured Section 1250 gain. Even if you didn’t claim all the depreciation you were entitled to, you have to reduce your basis by the amount allowable before calculating your gain. The rest of the gain gets long-term capital gains treatment at 0 percent, 15 percent or 20 percent, depending on your tax bracket. Then there’s the 3.8 percent net investment income tax (NIIT), which kicks in on income above $250,000 for a married couple filing jointly. You can walk through the whole calculation using IRS Publication 544, Sales and Other Dispositions of Assets. Or, call your tax preparer this week, or open your tax software and run it now—not next April. I’ve made a few assumptions to give you an idea of the rough math: $80,000 of depreciation and $95,000 of remaining gain turns into a tax hit of about $35,000. If that’s the case, you’d have $140,000 left. Assuming that’s the case, I think you should pay down your credit cards first. It’s hard to make money when you’re paying double digit interest rates. If you have $10,000 in credit card debt, that would leave you with $130,000. Next, pay down the $40,000 of student loans at 6 percent. Same reasoning here: The cash is earning 4 percent and you’re paying debt off at 6 percent. Not a winning strategy. That leaves you with federal loans of $20,000 at sub-4 percent interest rates. You can pay that off with the $900/month savings in less than two years (or faster, if you add in the monthly credit card debt payments you’re no longer making). Or, if the $175,000 was net of taxes, you can pay that off as well. At this point, you’d either have $155,000 or $90,000 in cash. That’s a nice amount of cash to have on hand for your peace of mind (or to use to move abroad, if you decide to do that). —Ilyce Classic Prudie My husband “Ken” and I got married when we were 27. We’d been dating for three years and built a life around the activities we loved doing—hiking, cycling, cross-country skiing, and many other active pursuits. Four years into our marriage, Ken was diagnosed with a chronic, incurable condition which flares up with no warning and is only somewhat controllable. He will deal with this for the rest of his life. The illness has made Ken into a different person. Never miss new Slate Advice columns Get the latest from Prudie and our columnists in your inbox each weekday, plus special bonus letters on Saturdays. Advice Personal Finance Relationships