Some people think their home is an asset, while others will tell them it’s a liability. But which is it? You might be surprised to learn that many people just can’t make up their minds on this tricky question. Does the answer seem obvious to you? Great! But, check out the rest of this article to see why some people might disagree with you, no matter which side you’re on.
Asset or Liability? How Can You Tell?
The first step towards knowing if your house is an asset or liability is knowing what assets and liabilities are. People like to create their own definitions, but let’s see what Merriam-Webster’s Dictionary has to say first.
According to Merriam-Webster, an asset is “an item of value owned.” Can you get more general than that? According to this definition, if you can sell it, it’s an asset. So, according to them, an asset could be a watch, a pair of shoes, or even a house. That is, as long as you can sell it.
Asset: “An item of value owned.”
Likewise, they also define a liability as “something for which someone is liable.” To be liable for something is to owe something. Therefore, a liability is a debt, like student loans or credit card balances. Or, in this case, a mortgage.
Liability: “Something for which someone is liable.”
Seems Obvious, So What’s the Big Deal?
Based on the above descriptions for assets and liabilities, this case is closed, right? Wrong. Yes, a house is an owned item of value. But it’s more than that, isn’t it? It’s also something for which you are liable. And no, I’m not just talking about the mortgage.
But, to better understand this, there are three key ideas we need to explore first. These include the history of the word “real estate,” how feudalism works, and eminent domain. That’s right, get excited! We’re about to go for a wild ride.
The Meaning of “Real Estate”
Like most words in the English language, the roots of those words are much older. The term “real estate” is no different. Many English words have Latin roots, as do French and Spanish words.
Those who study language and etymology (the study of the origin of words) know the Latin word for “king” is “rex.” This term, “rex,” has served as the base word for many other words relating to kingdoms (reign, realm, etc.). This is where the English and French get their word “royal.” But, the Spanish word for “royal” is different. They say “real.”
In fact, according to the Oxford English Dictionary, the oldest term recognizable as “real estate” dates back to 1605. The way the word was used refers specifically to feudal customs of land ownership. And, how did feudal land ownership work? The king owned the land, and he allowed the peasants to live on it, as long as they worked it as well.
Feudalism isn’t Dead
But, this is the twenty-first century. We don’t live like that anymore. Or, do we?
We may not exchange goods or services for the privilege of living on the king’s land, but we do pay property taxes. And to who do those property taxes go? The
That’s right, our modern property taxes are basically a relic of Feudalism, an archaic form of government from medieval Europe. We don’t really own the land. The government just lets us pretend we do as long as we pay them
rent property taxes. And what happens if you don’t pay your property taxes? They kick you off the land. It doesn’t actually matter if you own your house outright.
Eminent Domain, Explained
For example, the United States government has something called “eminent domain.” If you’ve never heard of eminent domain, you probably don’t belong to a farming family. Eminent domain is the right of a government to seize private land for public use, with compensation of course.
So, if your family has owned farmland for over 100 years, and the government decides they want to put a highway through it, they can force you to sell it to them in exchange for “fair” compensation. Never mind the fact they are taking away the farmer’s means of living. The compensation covers only the value of the property, not the loss of livelihood. But hey, the farmer never really owned the land to begin with, right?
Okay, But What Does This Have to Do with Assets or Liabilities?
So why does the history of language, feudalism, and eminent domain matter? Because they all show your house is both an asset and a liability.
When you buy a house on a plot of land, you buy the house, as well as the right to live on that land. But, strictly speaking, that land is not yours. Still, the right to live there has value, and you can sell that right to someone else. In that sense, home ownership is very much an asset, since it has value.
But, your home is also a liability, because you are liable to pay your property taxes. Just like someone will take ownership of your house if you don’t pay your mortgage, so too will someone take your land if you don’t pay your property taxes.
So, your home isn’t an asset or a liability. It’s both.
A Popular Alternative to Asset and Liability Definitions
Some people don’t define an asset as something of value which can be sold. Instead, they define an asset as something that generates income. Likewise, they define a liability as something that loses money. To these people, a house you live in is always a liability, because it doesn’t produce a revenue stream. Instead, you have to pay money to keep it operating (taxes, utilities, repairs, etc.). Robert Kiyosaki made this idea popular in his book, Rich Dad, Poor Dad.
By this definition, a house is only an asset if it’s a rental property, since hopefully the rent offset the costs that come with ownership. And no, value appreciation doesn’t count, since there’s no guarantee your home will grow in value. While often touted as a law of real estate, one needs to only look at the real estate crisis of 2008 to know property values are never guaranteed.
So, is your house an asset or liability? Well, both, depending on how you look at it. I don’t tend to look at assets and liabilities in terms of income. The evidence just isn’t there to support those ideas. It’s a handy way to label something, but it’s not based in reality. An asset is something you own that has value, and a liability is something you owe. Let’s not make it more complicated.
But, what do you think about home ownership? Do you think homes are an asset or a liability? Why? Let me know in the comments below!
A lot of people disagree on whether homes are an asset or liability. By definition, assets are something you own that has value. Liabilities are defined as something you owe. So, technically, as long as your house has value, it’s an asset. But, the origins of the word for “real estate” suggest otherwise. Really, land is owned by the government. If we don’t pay our property taxes, we can’t live there anymore. This is really an extension of Feudalism, a form of government dating back to Medieval Europe. Because of this, property taxes are effectively a liability, and come with home ownership. Therefore, homes really are both an asset and a liability. Some people define assets as something that brings in revenue, and liabilities as things that cost money. This idea was made popular by famed author and businessman Robert Kiyosaki. By his definition, because personal homes cost money to run and don’t earn money, they are always a liability. This idea flies in the face of standard business understandings of assets and liabilities but has become a popular alternative anyway. No matter how you look at it, homes are always a liability, and could be an asset, depending on how you define it.