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

Marcel Marekwica, Alexander Schaefer, Steffen Sebastian

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

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.
Original languageEnglish
JournalJournal of Economic Dynamics and Control
Volume37
Issue number6
Pages (from-to)1110-1125
ISSN0165-1889
DOIs
Publication statusPublished - Jun 2013

Keywords

  • Portfolio Choice
  • Housing
  • Tax-deferred Investing
  • Tax Arbitrage

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