Life Cycle Asset Allocation in the Presence of Housing and Tax-Deferred Investing

Marcel Marekwica, Alexander Schaefer, Steffen Sebastian

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Abstrakt

We study the dynamic consumption-portfolio problem over the life cycle, with respect to tax-deferred investing for investors who acquire housing services by either renting or owning a home. The joint existence of these two investment vehicles creates potential for tax arbitrage. Specifically, investors can deduct mortgage interest payments from taxable income, while simultaneously earning interest in tax-deferred accounts tax-free. Matching empirical evidence, our model predicts that investors with higher retirement savings choose higher loan-to-value ratios to exploit this tax arbitrage opportunity. However, many households could benefit from more effectively taking advantage of tax arbitrage.
OriginalsprogEngelsk
TidsskriftJournal of Economic Dynamics and Control
Vol/bind37
Udgave nummer6
Sider (fra-til)1110-1125
ISSN0165-1889
DOI
StatusUdgivet - jun. 2013

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