The best solution depends entirely on your lifestyle.

If you will have guests frequently (perhaps visiting parents/grandparents), then a second master is nice, because then your guests can have their own bathroom.

A second living space upstairs can be an office or even an occasional guest room if it is not needed as a "hang out" space.

Well, what is it you need? Maybe you need extra storage. Or a home office. Or an arts space.

If the need is not obvious to both of you, don't do either.

It looks like you already have 3 areas with couches downstairs. Why would you need another living room? I would go with the bigger master suite.

Is a living area upstairs important to you? Why aren't the bedrooms enough? Are all of the bedrooms going to be used - if not, then make one of them a living area.

Do you desire a larger closet and bathroom in your master.

Do you need an extra living area on the 1st floor - side by side. I have a living room and family room and we use the family room much more than the living room. They are not right next to one another.

What is below the kitchen?

You could make that nicer new master suite. turn the old one into an office or other, and expand on that bathroom to add a laundry. Close to where 90% of your laundry is generated and gets put away.

Or, expand the original master to take over the hall bathroom. Build out the loft to be a new second bedroom. with a bathroom above the downstairs powder room.

thanks for all your comments and suggestions. I just wanted to point out that we have a ten year old girl and a 1.5 year old boy so we would be needing all three bedrooms. If we do make a larger master suite, i would give my daugther the current master bedroom

thanks @bpath for your suggestions, they are good and actually was considering one of them. currently below the bathroom is a storage and a laundry room

IMO an empty open space creating all kinds of issues with sound, heating and cooling is wasted space so closing that and creating something youNEED is a good idea. I will however think giving one child a master and the other not is not fair so I think a rework to provide close to eaqual bedrooms for kids is always a nice plan.I see no reason for anoter entertaining space unless you plan to have space for the kids not involved with your daily life .I cannot read the sizes of the spaces but 3 seating areas on the main floor are IMO one too many.

I will however think giving one child a master and the other not is not fair so I think a rework to provide close to eaqual bedrooms for kids is always a nice plan.

I wonder if the 1.5 year old would feel it's not fair...LOL!

Fair is not the same as equal. In nine years the boy will be ten and may inherit the ensuite because his sister may no longer be living at home. I recommend the book "Siblings without rivalry".

That’s a huge space. Would you board the windows up at the master and bedroom 3 that border the space? Does the loft and current master bedroom lie adjacent to neighbors or is one potentially quieter than the other. It seems like you could do courtyards. I might make it a larger master and keep one room as a guest/office.

If you end up with the plan that gives your daughter the master suite, consider moving the hall bath door to your son’s bedroom. There will be no need for a hall bath upstairs, and he will appreciate the convenience.

With no hesitation I would create a second living/family room. When your kids are older and hosting friends, you will very much appreciate having a second space for them to hang. (Speaking from experience!)