Is My Home an Asset or Liability?

The classic definition says yes but the new definition says no. And so the debate begins…

People ask us all the time whether we think their home is an asset or a liability. Most homeowners assume that their home or principal residence is an asset. People think this because they believe a house has ‘perceived value‘ and ‘future benefit‘, and therefore is definitely an asset. As with any debate, it’s all in the details of how you define an asset versus a liability. However, if it were this simple, then why do people keep asking the same question over and over again? In this article, we will explore the ongoing question: Is my home an asset or liability? Keep reading to hear our perspective…

The Classic Definition of an Asset & Liability

The classic definition of an asset versus a liability is the textbook definition that financial planners and accountants use. The literal meaning of an asset is anything that has value. A liability is anything that you owe.

From this textbook classic definition, any investment or ‘thing’ that you own can be:

  1. An asset because it has value
  2. A liability because you owe something
  3. An asset AND liability because it has value but you still owe something
  4. Neither an asset or liability because it has no value and you don’t owe anything

So you might ask: is my house an asset or liability? The simplest answer according to an accountant or financial planner is that your home is considered BOTH an asset AND liability (#3 above). Your house has both value and you still owe something. Let’s explore deeper…

AssetLiability
House
(depreciating asset)
Mortgage
Land
(often appreciating asset)
Secured Line of Credits
(like HELOCs)
Air Rights
(above you if you own)
Property Taxes &
Water & Sewage*
Mineral Rights
(below you if you own)
Strata / Community Fees*
(if any)
Local Residential Rights
(like school catchment)
Utilities, Insurance &
Maintenance*
* these liabilities/expenses are also known as ‘Cost of Carry

As you can see from the above, there are many aspects of a house or home that can be categorized as an asset. There are also lots of things that are definitely liabilities. Therefore, your home is both an asset and liability when it comes to the classic dictionary/textbook definition.

Net Asset versus Net Liability

In this classic example, if your combined home ‘assets’ are worth MORE in value than your home ‘liabilities’ then your house is a ‘net asset‘. However, if your combined home ‘assets are worth LESS in value than your home ‘liabilities’, then your house is a ‘net liability‘.

Deflation of Fiat Currency

Of course, a principal residence or home’s main value is as a place for you and your family to live. Everyone needs a home or shelter… it is essential. We also know that fiat currency devalues over time.

So, there is an interesting twist: If a homeowner has a fixed mortgage (not variable) on their home, and the value of fiat currency continues to devalue, then the real value of the mortgage payments shrink over time. This results in a very surprising and unexpected increase in the homeowner’s real net worth, which should also be factored into the asset versus liability equation and debate.

However, this doesn’t explain everything accurately…

The classic definition of an asset is anything that has ‘value’. But this textbook definition defines ‘value’ as:

  1. Something that has ‘future benefit‘ in the form of portfolio income (also known as ‘capital gains‘)
  2. Something that has ‘perceived value‘ that is very subjective and is ‘worth’ something different to different people

The problem with this ‘value’ definition is that it doesn’t define value as ‘here and now’ but of the ‘future’. As we all know, the future can unfold in many different tangents. We can’t predict the future. The same goes with assets, especially a home. We can’t definitively predict that our home (or asset) will increase or decrease in price. It may or may not give us capital appreciation (or portfolio income).

In regards to monthly cash flow, a house definitely is more of a liability when it comes to this classic definition. Usually a home will have no cashflow coming in (passive income) but lots of cash going out (liabilities and expenses).

Therefore, the focus of the textbook definition of an asset is based on capital gains value in the future rather than monthly cash flow right now.

So do you think your home is an asset or liability? But wait… there’s more to this ongoing debate!

The New Definition of an Asset & Liability

The new definition of an asset versus a liability is the ‘easier to understand’ definition that the wealthy and financially educated use. The literal meaning of an asset is anything that puts money in your pocket while a liability is anything that takes money out of your pocket.

From this new definition, any investment or ‘thing’ that you own needs to consistently put money in your pocket in order for it to be classified as an asset. This new definition takes into account ‘passive income‘ (or positive cashflow) and NOTportfolio income‘ (or capital gains). Passive income is money that you receive ‘here and now’ whilst portfolio income is money that you may or may not receive in the future. That’s the key difference between the classic and new definition of an asset versus liability. Let’s dig a bit deeper…

AssetLiability
Rental Property
(Residential & Commercial)
Home & Land
(Principal Residence)
Dividend Paying StocksNon-Dividend Paying Stocks
Yield Generating Commodity-Backed Gold StablecoinGold Bars
Yield Generating CeFi Wallets
for Crypto
Holding Crypto on a
Hardware Wallet
Monetizing Social Media &
Websites
Static Social Media & Websites

As you can see from the above examples, all assets generate consistent passive income (money into your pocket). On the other hand, liabilities do not generate cash flow and they all have associated expenses and carrying costs (money out of your pocket). More importantly, your home is classified as a liability according to this new definition as it doesn’t provide positive cash flow but has a lot of expenses that will never go away.

Therefore, the focus of the new definition of an asset is based on passive income and cash flow rather than the possibilities of future capital gains that may or may not materialize.

So, is my home an asset or liability? How would you describe your house? Is it both an asset and liability (classic definition) or just a liability (new definition)? Here’s some more food for thought…

Global Financial Crisis

During the 2007 to 2009 Global Financial Crisis (GFC), many real estate markets plummeted around the world. The result of loose mortgage regulations, sub-prime mortgages, over-leverage and many other factors caused markets to decline to prices not seen in decades.

As a result, many homeowners realized that they owed more money than what their homes were worth. So the ‘asset’ that they were banking on for their nest egg and net worth had plummeted in value, creating a ‘net liability’. Not only that, they were still on the hook for the liabilities and paying expenses such as property taxes, utilities, maintenance etc. Hundreds of thousands of homeowners could no longer afford their homes but if they sold, they would create a net loss and have to come up with cash to get out. Does this sound like a true asset to you?

The Global Financial Crisis exposed the complexities and inaccuracies of the classic definition of assets versus liabilities. It also reopened the debate: Is my home an asset or liability? From the classic definition standpoint, the GFC exposed that your home is NOT an asset as the value for some homeowners was negative (you owed money). From the new definition standpoint, your home is also NOT an asset, as no positive cash flow was collected as a consistent source of income.

In summary, most homeowners consider their home a place to live (simply, a primary residence). Most people consider their home an asset too, as there is perceived future value if and when you sell. However this is not guaranteed. Because of this, there is a growing movement of homeowners who believe a home is not an asset, but a liability. No money comes in but lots of money flows out of your pocket (seen first-hand during the GFC). This debate will continue for decades and people will need to agree to disagree. As always, education is the key to understanding the terms and definitions involved in a great debate such as this.

So what are your thoughts about this great asset vs liability debate? Is your home an asset or liability or both?

Furthermore, if you believe your home is a liability, there are many ways to convert that into an asset generating positive cashflow. Click on the button below to learn more.