Life Cycle Asset Allocation in the Presence of Housing and Tax-Deferred Investing
Posted: 1 Nov 2014
Date Written: June 30, 2013
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
JEL Classification: G11, H24, R21
Suggested Citation: Suggested Citation