Life cycle asset allocation in the presence of housing and tax-deferred investing

Marcel Marekwica, Alexander Schaefer and Steffen Sebastian ()

Journal of Economic Dynamics and Control, 2013, vol. 37, issue 6, 1110-1125

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.

Keywords: Portfolio choice; Housing; Tax-deferred investing; Tax arbitrage (search for similar items in EconPapers)
JEL-codes: G11 H24 R21 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:37:y:2013:i:6:p:1110-1125

DOI: 10.1016/j.jedc.2013.01.008

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