Advice needed on Capital Gains and Paying Off Debt

[Jessica Hood]

I am about to list my current home for sale.  I am in contract on another property.  I have about $50k to $60k in equity on the current property.  I would like to roll half of that equity into the new property and use the remaining part to pay off my car loan of $25k, thus reducing my debt to income ratio.

I know that if you invest your equity into real estate that you do not have to pay capital gains tax on it.  What I do not know is if I roll part of that into my car, is it considered a tax free investment as well?  Or does that only apply to real estate investments?

The lender wants me to pay off one of my credit cards with a $5k balance and a $10k limit, plus close the account. FHA requires proof that the account is closed. I only have one other credit card of $2k. I suggested paying off the auto loan instead, because I feel like closing my credit card account will only hurt my credit score and eliminate established credit that I worked so hard for. You have the best credit score by having about 2 credit cards with low credit utilization. The length of time your accounts have been open also is important. By closing that card, I wipe out part of my credit history, reduce my available credit to debt ratio, and would then only have one credit line.

Paying off the credit card instead of the auto loan means several other things.  Less to potential cost of capital gains tax and more money to roll into the property.

I do realize that paying off the auto loan also has a negative impact on my credit, but I don't think it is as severe.

So, I am trying to figure out the best plan of action.  Pay off the credit card or the auto loan?  And how does capital gains tax play a roll in it?

Thanks!