Your House Is Not an Asset; It’s an Expense (Content for Financial Advisors) (2024)

FAQs

What does your house is not an asset mean? ›

Your primary residence is not actually an asset - it's an expense and a liability. Here's why: An Asset Provides Income. By definition, an asset is something that has the potential to generate cash flow and profits for its owner. Good examples of true assets include stocks, bonds, rental properties, businesses, etc.

In addition, a home contains a lifetime of memories, not just a market price. However, though a home is certainly an asset when thinking about your net worth, when crafting your income statement for retirement, your primary home should reside under the expenses column.

Given the financial definitions of asset and liability, a home still falls into the asset category. Therefore, it's always important to think of your home and your mortgage as two separate entities (an asset and a liability, respectively).

The easiest way to distinguish between an expense and an asset is to look at the purchase price of the item. As outlined in the definitions above, anything that costs more than $2,500 (or whatever your business' cap is) is generally considered an asset; whereas items under the $2,500 threshold are considered expenses.

In sum, mortgage-financed housing wealth may be an asset for some higher-wealth households, who gain from its use as a hedge against long-term care cost risk. It may be a liability for others, though, especially minority households.

Some people do make money from their homes, and when they do, it can then become an asset. The way most people make money is from selling a house after years of living in it. This is what you call realizing equity. The difference between what you bought your house at and what you can sell it for is appreciation.

In addition to the down payment, there are a number of ongoing costs specific to homeownership, too, including mortgage payments and interest, property taxes, utilities, homeowners association fees and ongoing repairs. All of these expenses may make homeownership out of the question.

Housing Is the Largest Expense on a Child

Based on expenses incurred among all age groups, housing accounted for 32 percent of child-rearing expenses for a child in the lowest income group, 31 percent in the middle-income group, and 33 percent in the highest income group.

According to Robert Kiyosaki, assets put money in your pockets, while liabilities take money from your pockets. In his book, he mentioned that cashflow is key. And based on these definitions, something is only considered an asset if it provides you with positive cashflow and puts money in your pocket.

What is the difference between an asset and a property? ›

Property is anything that can be owned, such as a house or claims to a resource (which includes land). In contrast, an asset is anything worth something. Unlike property, assets don't have to be tangible objects that you physically own. For example, stocks and bonds are considered assets.

While an asset is something with economic value that's owned or controlled by a person or company, a liability is something that is owed by a person or company. A liability could be a loan, taxes payable, or accounts payable.

Here is a quick explanation of the primary differences between these two financial terms: An asset is a business resource that offers economic benefit to the business in the future. An expense is a resource that the business has already consumed during the operations of the company for a specific accounting period.

An expense is a cost that businesses incur in running their operations. Expenses include wages, salaries, maintenance, rent, and depreciation. Expenses are deducted from revenue to arrive at profits.

An expenditure should be recorded as an asset if there is a benefit to the company outside of the current accounting period. An example is when a company purchases an insurance policy for the next year. This should be recorded into an asset account called prepaid insurance.