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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

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.

Suggested Citation

  • Marekwica, Marcel & Schaefer, Alexander & Sebastian, Steffen, 2013. "Life cycle asset allocation in the presence of housing and tax-deferred investing," Journal of Economic Dynamics and Control, Elsevier, vol. 37(6), pages 1110-1125.
    • Handle: RePEc:eee:dyncon:v:37:y:2013:i:6:p:1110-1125
    DOI: 10.1016/j.jedc.2013.01.008
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    Cited by:

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    3. Paukku Eelis, 2022. "How tax policies create unexpected results when interest rates are low: A case study of Finnish housing company debt and private investor return," Nordic Tax Journal, Sciendo, vol. 2022(1), pages 45-57, December.
    4. Brown, David C. & Cederburg, Scott & O’Doherty, Michael S., 2017. "Tax uncertainty and retirement savings diversification," Journal of Financial Economics, Elsevier, vol. 126(3), pages 689-712.
    5. Anson T. Y. Ho & Jie Zhou, 2016. "Housing and Tax-Deferred Retirement Accounts," Staff Working Papers 16-24, Bank of Canada.
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    7. Palicki Sławomir, 2020. "Housing Preferences in Various Stages of the Human Life Cycle," Real Estate Management and Valuation, Sciendo, vol. 28(1), pages 91-99, March.

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    More about this item

    Keywords

    Portfolio choice; Housing; Tax-deferred investing; Tax arbitrage;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • R21 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Household Analysis - - - Housing Demand

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