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

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  • Marekwica, Marcel
  • Schaefer, Alexander
  • Sebastian, Steffen
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    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.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

    Volume (Year): 37 (2013)
    Issue (Month): 6 ()
    Pages: 1110-1125

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    Handle: RePEc:eee:dyncon:v:37:y:2013:i:6:p:1110-1125

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    Web page: http://www.elsevier.com/locate/jedc

    Related research

    Keywords: Portfolio choice; Housing; Tax-deferred investing; Tax arbitrage;

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    References

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    Cited by:
    1. Fischer, Marcel & Kraft, Holger & Munk, Claus, 2013. "Asset allocation over the life cycle: How much do taxes matter?," Journal of Economic Dynamics and Control, Elsevier, vol. 37(11), pages 2217-2240.

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