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.
- Portfolio Choice
- Tax-deferred Investing
- Tax Arbitrage
Marekwica, M., Schaefer, A., & Sebastian, S. (2013). Life Cycle Asset Allocation in the Presence of Housing and Tax-Deferred Investing. Journal of Economic Dynamics and Control, 37(6), 1110-1125. https://doi.org/10.1016/j.jedc.2013.01.008