Life Cycle Asset Allocation in the Presence of Housing and Tax-Deferred Investing

Posted: 1 Nov 2014

See all articles by Alexander Schaefer

Alexander Schaefer

Goethe University Frankfurt - Department of Finance

Marcel Fischer

Copenhagen Business School

Steffen P. Sebastian

University of Regensburg - International Real Estate Business School (IREBS)

Date Written: June 30, 2013

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

JEL Classification: G11, H24, R21

Suggested Citation

Schaefer, Alexander and Fischer, Marcel and Sebastian, Steffen P., Life Cycle Asset Allocation in the Presence of Housing and Tax-Deferred Investing (June 30, 2013). Journal of Economic Dynamics and Control, Vol. 37, No. 6, 2013. Available at SSRN: https://ssrn.com/abstract=2516830

Alexander Schaefer (Contact Author)

Goethe University Frankfurt - Department of Finance ( email )

Mertonstr. 17
Frankfurt, 60054
Germany

Marcel Fischer

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark
+45-3815-3628 (Phone)

Steffen P. Sebastian

University of Regensburg - International Real Estate Business School (IREBS) ( email )

Universitaetsstrasse 31
Regenburg, Bavaria 93040
Germany
+49(941)943-5081 (Phone)
+49(941)943-5082 (Fax)

HOME PAGE: http://www.irebs.de

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