We use a calibrated life-cycle portfolio choice model of homeowners, exposed to uninsurable income risk, to show that empirically observed differences in tax deductions for mortgage interest payments and voluntary pension contributions have quantitatively sizable effects on household portfolios and macroprudential risks. We illustrate that more generous deductions significantly reduce the effective cost of holding debt and increase the after-tax return of pension savings. As a result, the incidence of mortgages increases and the portfolio shifts from home equity and liquid assets towards pension assets while leaving net worth approximately unchanged. We further find that more generous deductions shift the tax burden from the relatively poor and indebted to richer homeowners, which improves the homeowners’ ability to smooth shocks. Thus, consumption volatility decreases although indebtedness and the illiquidity of homeowners’ portfolios increases. We illustrate the implications for the distribution of the marginal propensities to consume (MPCs) and the consumption elasticity with respect to house price changes. We find that the tax deductions make the consumption of the majority of mortgagors who are not borrowing constrained, more resilient after a housing bust. The higher incidence of the borrowing constraint and the more illiquid portfolio induce an opposite effect, which is dominated quantitatively in our benchmark calibration.