Should we sell rental to pay off student loans?

[Jameson Hedin]

My wife and I are considering selling a rental to pay off our student loans and are having a hard time making the best decision for our future. Here is the situation:

Our student loans are about 90k total at an average of about 5.5% interest. We pay about $1,100 monthly. We will have 1/3 of that paid off in 5 years and 10 years away from paying off the rest with minimum payments.

My wife stopped working for now to have our 2nd. She will work again but not sure when. As it stands our debt to income is making buying a personal home difficult (we are renting).

Our rental was just appraised by our realtor at $440,000 (conservative as per him) and we owe $258,000. The net gain on those numbers would be $145,000. We have gotten very lucky on appreciation. We have owned for 4 1/2 years and lived in it for the first 2 1/2, so we wouldn’t pay capital gains (though we would pay depreciation recapture for 2 years. I found that out on the forum yesterday. Very helpful).

The rent is at $2,100 (could be $2,300 and we would raise rents if kept) and all current expenses are just shy of $1,600. So around $250-$300 net/month after cap ex. We have a total of $40k in the property.

Our thought is that our gain in appreciation is very fortunate and it may be a good time to sell considering the lower return on our investment from rent and the reasonable assumption (though this is more speculation) that the appreciation returns will flatten. We would pay off the student loans and plan to reinvest the balance from the sale in a future property. Our increase in monthly net income would be saved for primary residence.

Is it better to keep the house? Sell and reinvest the entire amount? Or should we pay off the debts? Any and all feedback welcome.