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Is Your Home an Asset or Liability?

This article was written by in Real Estate and Home. 36 comments.


When is your house a liability? Does the fact that you have a mortgage make your house a liability? Or do you have to owe more than the house is worth? What is a liability, anyway?

Well, it depends. Looking at your house from a financial perspective, which you should do because if you’re like many people in the United States, most of your wealth is “tied up” in your house, it is not a liability. A liability is defined as something you owe to someone else. You do not owe the house to the person from who you purchased it, nor do you owe the house to the bank. You may owe the balance of your mortgage.

A house, like any other object that comes into your possession, is classified as an asset. An asset is something you own. A house has a value. Whether you assign the value as the price at which you purchased the house or the price at which you believe you can sell the house, that amount is how much your house is worth.

You can offset the value of the asset with the value of the mortgage, your liability. Your house, an asset, subtracted by your remaining mortgage, your liability, results in your wealth due to your house. That’s commonly called your “equity,” but that has a murky definition, too.

So why do so many people claim that your house is a liability if it’s clearly incorrect from a financial standpoint? Most of this stems from one personal finance “guru.” Robert Kiyosaki, a successful marketer of products, believes an asset is anything that provides cash to you, while a liability takes your cash away. These are not the traditional meaning of the words, but this establishes a framework for the ideas Kiyosaki tries to sell. Kiyosaki believes you should strive to increase the assets that provide positive cash flow (Kiyosaki-assets) and reduce the assets that require negative cash flow (Kiyosaki-liabilities).

The concept is sound, but Kiyosaki’s use of the words “asset” and “liability” angers those of us who understand finance and prefer not to confuse the general public by redefining words. But taking a step back from finance, consider this:

There is at least one other legitimate definition or “sense” of liability. In a broader sense, a liability is anything that puts an individual at a disadvantage. Yes, debt is a liability, both financially and generally. You may love your children, but if they’re chronic behavior problems, they may be a liability.

If you own a business that makes millions of dollars each year — and wouldn’t that be nice — chances are you could sell that business if you need to, and command a very high price. That business is a good example of an asset (even if the business itself contains assets such as buildings and liabilities such as debt). But if that business is legally risky, and there is possibility of being arrested for operating it, you could argue that the business is a liability to your ability to continue living freely.

Once you start looking at the big picture, the line between asset and liability, usually neatly drawn down the center of the balance sheet, looks a little fuzzier.

Ask anyone with a financial background whether your house is an asset or liability, and they will unequivocally tell you that it is an asset, contributing to the total of your net worth. but that definition only takes you so far. If owning your house prevents you from using your money for better purposes, you could argue that it is a liability in the broader sense of the word.

Just don’t try to put the value of the house on the right side of your balance sheet.

Update: In response to this post, Mighty Bargain Hunter shares his thoughts about the practicality of Kiyosaki’s redefinitions.

Updated October 17, 2012 and originally published February 16, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 36 comments… read them below or add one }

avatar Mr. GoTo

Someone needs to stick a big sock in Kiyosocki. His only apparent talent is selling books and seminar tickets. He is very good at that indeed.

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avatar Andrew

I think the bigger terminology faux pas is calling your house an ‘investment’ and expecting it to always increase in value. Unless you are flipping houses it is not an investment; it is only an asset, and one that you have to pay to maintain.

It is true that home prices have traditionally risen over the years, but evidence suggests that until recently home prices have followed inflation, so you probably won’t come out ahead in any sort of investment appraisal of your house, especially considering maintenance costs over the years.

The only thing that will increase the value of your home other than improvements is the scarcity of land in the area, which over the long term can be hard to determine.

This is not to say you shouldn’t buy a house, just don’t expect to earn a profit from it. Use it, live in it, make it your own, and be happy.

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avatar UH2L

The huge distinction between normal assets and liabilities is that you need a place to live. So regardless of whether your house/condo is considered an asset or a liability, it removes the need for you to pay rent which would be a recurring expense without an end point. Unless you get an ARM, mortgage payments don’t increase whereas rent payments do. But houses do require upkeep. My house may not go up in value, but since I don’t live there right now, it also provides some rental income, thereby reducing its liability load on me. Luckily, I put 20% down on a 20 year loan. I actually have equity in the house even though I purchased it near the peak in the summer of 2005. Low interest rates definitely helped. Just buy a house because you want to live there and it doesn’t matter so much whether you call it an asset or a liability.

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avatar CJ

While a house is “technically” an asset, I’d still prefer thinking about it as a liability. This way, it encourages me to attack my mortgage rather than just accept the mortgage.

I think about it this way. If I lost my job tomorrow, would my house be an asset or a liability? My last house took almost 1 year to sell and I was priced about $10,000 lower than similar houses in my neighborhood. If I had no job, I couldn’t last 1 year. (I currently have a 6 month emergency fund but most people don’t have much more than 1 month) This overall would make my house a liability.

Now I could cut the selling price of my house significantly but most people don’t consider bottom feeder market price and rather their true market value (which seems to change daily right now) when calculating their net worth. If your mortgage is around 80% of the value of your house, you are probably realistically at a break-even point in the case of an emergency. This is a borderline liability. If you have your mortgage at around 70% or less of the value of your house, you could consider it an asset but remember that you are going to lose a lot of value if you had to sell it tomorrow.

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avatar Jeremy

I just came here to basically say what UH2L said. People often forget that you buy a house to satisfy one of your basic human needs of shelter. If you’re buying a property strictly as an investment and aren’t using it to put a roof over your head, then you’re more or less looking at it from a strict asset/liability perspective. So that’s where I agree with Flexo in that it’s an asset because most people are going to be making a monthly payment for shelter whether it’s for rent or to pay down a mortgage balance. So if you actually have something to show for your payments, it’s likely an asset.

Of course, I think you could also argue that someone who bought more house than they actually need and find themselves in a bad financial situation because of it may have more of a liability than an asset, but that’s a completely separate discussion.

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avatar Nate @ Money Young

I distinguish between house and home.

Your home is not an asset, you’re not likely to sell it any more than you are likely to sell your kids.

A house is an asset, because it can bring in income if you rent it out, or sell it for a profit.

house vs. home.

-Nate

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avatar Mario

Interesting post, I do agree with Mr. Kiyosaki’s definition of an asset vs. liability.

An asset puts money in your pocket

A liability takes money out of your pocket

I like what Nate @ Money Young said about house vs. home…great point

Also if your home was increasing in value your home is still not your asset really, its the banks asset because they are the ones receiving that income from the mortgage you pay every month.

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avatar Yana

I think a house is an asset if you own it. And I do not mean owning a mortgage. If a home is not paid off, I don’t see it as an asset. Owning debt is not an asset.

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avatar vilkri

I agree with Nate. There is a distinction between a house and a home. We have forgotten about that distinction. A home is where you live with your family whether you own the house or not. For most families and for most of history in the US families lived in their homes for a long time. Most families also owned their own houses which were a source of wealth creation and accumulation to be tapped into in old age or to pass on to the next generation. But all that happened before we started looking at a home as a house or as a piggy bank from which we can withdraw the accumulated equity.

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avatar The Happy Rock

Right on CJ! I think you illustrated my thoughts exactly!

Nate makes an interesting point too.

Great discussion all!

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avatar Customers Revenge

That’s a nice way to talk about it. Kiyosaki is right that a house is tied up money with lots of associated costs. Also right that it does strictly speaking have value. Good little post.

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avatar troy

house is an asset. All of them despite their use. rent isn’t an asset, it is income.

the mortgage is the liability,not the house

all houses require “upkeep”and maintenence including investment properties that RK classifies as assets, so that argument is bunk.

some assets appreciate, some depreciate, but they are still assets.

from a financial standpoint a liability is a debt. houses aren’t debts. mortgages are.

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avatar Mike

Kiyosaki pushes too hard on this one. But he’s on to something here. His basic point seems to be that people buy a house thinking it’s an “asset”… and then discover that this “asset” requires spending after spending after spending, which sounds more like a liability, actually. By contrast, let’s say I buy 1000 shares of Coca-Cola. The market price may go up, or it may go down, but the shares are clearly an asset, because so long as the company keeps paying a dividend it’s paying me money (which the house you’re living in won’t do); and as long as the stock doesn’t become worthless, I can sell it for something, even if it’s less than I paid for it (which is, of course, also true of the house you’re living in).

There’s also, of course, the strictly accounting definition: your house is an asset, whereas any mortgage, plus your property taxes, are liabilities. And fixing the roof isn’t a liability, but simply an expenditure that goes with owning an asset.

And then there’s the purely subjective definition: when property values are shooting ever upward, and you’re treating your house like an ATM– or selling it for an enormous capital gain– it’s clearly an asset; when termites attack, mold spreads, the roof dies, and the chimney cracks, all in the same month, it’s clearly a liability.

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avatar michael

let us play along and call our houses assets, but we know that this is just emotional stuff. True assets bring in money, the same cannot be said about our houses until we dispose of them and earn a hefty profit to cover previous expenses like maintenences, property rates and taxes.

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avatar vilkri

As I was reading other comments to this post, I was thinking about another concept that we have to take into consideration which may make things even murkier. People have two basic options about paying for their living quarters – renting or paying off a mortgage. If Kiyosaki argues that paying off a mortgage is a liability, what argument does he make about paying rent? I think another important questions is about opportunity costs. What are the opportunity costs of NOT paying a mortgage?

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avatar B7

It’s a liability. Anyone who thinks that their house is an asset can stop paying their mortgage and see what happens.

Kiyosaki redefines asset and liability in a way that teaches people to become rich. Those accounting and MBA people are reluctant to learn from a book that costs $10.

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avatar Luke Landes ♦127,505 (Platinum)

It’s a liability. Anyone who thinks that their house is an asset can stop paying their mortgage and see what happens.

What happens when you stop paying a mortgage has no bearing on whether a house is an asset or not. Just because Kiyosaki says something is true doesn’t make it true in reality. You can think about a house however you like if that helps you, but if you want to communicate in the real world, it helps to understand and accept the financial definitions of “asset” and “liability.”

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avatar B7

What do you mean by “the real world?”

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avatar Luke Landes ♦127,505 (Platinum)

That probably sounded a bit harsh. If you want to have a discussion with anyone who deals with finances — say, your tax accountant, someone who needs to know about your assets and liabilities — and you call a house a “liability,” they’ll laugh you out the door. In financial terms, a house is an asset and a mortgage is a liability. If you want to think about a house as a liability because it’s a money drain, that’s your prerogative, but the real financial definition of liability is not “money drain” (see the article above). Kioysaki used two words that sound financial to represent two other financial concepts usually called “cash-flow positive” and “cash-flow negative.” Assets can be either. An asset that you spend money on isn’t suddenly a financial liability.

Sure you can talk to other Kiyosaki fans and you may understand each other, but there aren’t enough Kiyosaki fans to affect real usage of the words asset and liability. Using those words for any other purpose in a financial context creates unnecessary confusion among people with a financial understanding who don’t care much for or are unfamiliar with Kiyosaki.

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avatar Yana

I don’t know what Kiyosaki’s argument would be for paying rent, but I can tell you that paying rent can cut your housing costs in half – how much depends on the person and property. While you pay rent, you save money, and you do not spend on repairs, home improvements, and in some cases, water and garbage service. When you pay rent, besides that the straight out costs are much smaller, you are not paying multiple times the purchase price of the home, as you do with a typical mortgage. My friend, as one example, as been paying on her house for over 20 years. The purchase price was $78,000. Today, they still owe $50,000. That is going to be one expensive home, as she has been doing many home improvements lately besides paying an arm and a leg without them.

If one lives long enough and starts young enough, one has the REAL opportunity of actually owning a home through saving for it, buying it outright and paying zero interest. It’s a big bonus that the one who does this does not have to have faith in the ability to come up with funds to pay for the past. I personally have never believed in job security. I’m short on faith.

With a mortgage, you have the opportunity to say you own a home, when what you really “own” is a debt, and you pledge to be a slave to that debt for the typical 30 years.

An excellent alternative for those who really believe that paying rent is throwing money down the toilet is to build your own home.

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avatar downtell

Great posts awesome info. I have read Mr. Kiyosaki’s books and find that the messege is being lost in the semantics here. Asset; liability; investment what ever you call it. The average family (and I do mean average), buys a house and mortgages it for 30 years. Say a mortgage payment of $1250 (my house), you end paying after 30 years $450,000. Paying this for 15 years is $210,000. Regardless of how much of this is tax’s/insurance or towards the premium, this is still money being payed to the house. The messege is unless your “business” is realestate or you plan to sell the house before you reach the equilibrium of amount sold to amount payed, you will lose money on the house. It is acknowledged that we all need a place to sleep, keep our stuff, share memories etc… but his overall goal in the book is for you to get to financial freedom and not become complacement with false ideas that a house will bring you, a typical buyer, financial gain. Look if a lot more people viewed it this way, we as tax paying citizens would not be paying for other people’s houses as is the case with modern events.

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avatar JD

I think Kiyosaki is nothing but a sleazy charlatan but I do agree with the idea that a house is a liability in a sense. I personally don’t view it as an asset either. If someone has most or all of his “net worth” tied up in his house I consider them poor. Whatever worth you have tied up in your house is tied up, you can’t get to it but each and every month you are paying a mortgage, property taxes, and maintenance. I consider net worth whatever is liquid, in a sense I’d be willing to consider a house as part of someone’s net worth if they were realistic about a liquidation value – i.e. if you had to sell right now what would you be left with after all fees, commissions, and mortgage was paid off. I’d say probably 100% of the net worth statements I have seen are never realistic about this value. Just like the banks found it easy to inflate illiquid asset values because they could argue they were worth that much, people do the same with their homes. They also fail to remember that all the fees and commissions come out of your equity. But in any case a more realistic net worth calculation would not include your home. The only difference is the person who doesn’t own a home has a higher future housing liability. Then again I can’t think of one person I know who paid less for mortgage payments then they paid for monthly rent. The difference is most people buy homes that are much larger than the places they live in when they rent. But do they really need the space? Who knows. In any case, they are becoming poorer and poorer because they are now stuck paying for a house and all that comes with it.

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avatar AJC @ 7million7years

Robert Kiyosaki may be technically wrong, but he is absolutely correct … in fact, RK – and, this specific piece of advice – was one of the key catalysts to launching me on my own journey of financial self-discovery that took me from $30k in debt to $7 million in the bank in just 7 years. Truly.

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avatar Millionaire Acts

This is one of the hottest issues brought by Kiyosaki in his teachings. Ultimately, based on my readers’ comments, I agree that a house is definitely an asset whether it’s getting out cash from your pocket.

One of the best arguments that my readers give is that cashflow does not alter an asset to a liability or vice versa. It just says how good the investment is. An investment that flows cashflow into our pockets makes it as a good investment. Conversely, an investment that fflows cash out from our pockets makes it a bad investment.

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avatar TW

I just read kiyosaki’s book. I think like anything else you take it with a grain of salt. I am young, so I may not know much, but I am about to buy a house. I think it is going to be a good move financially – I am buying in an area where the market is at a huge low point, and I will be paying MUCH less on a mortgage and taxes etc. then if I were to rent. And when I sell in 5 years, I should at least be able to get back what I paid – since it is currently dirt cheap.

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avatar Jason

Whether you consider the house itself the asset and the mortgage the liability is only a matter of legal wording for banks, accountants, and lawyers. I’m firm on the belief that buying a house is a liability and should not be thought of as an investment unless you pay cash for it, flip it, rent it, or have it payed for in short order. Take a look at your mortgage amortization schedule and it’s obvious. If you bought a $174,000 home today at 5.25% interest, on a 30 year mortgage, you will still be paying $427,198 for a $174,000 house after 30 years. How is this considered a good deal? If someone wanted me to pay him $300 for borrowing $100 I’d tell him to get bent. We should do the same for the banks.

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avatar Tyler Durden

I think your missing the point…

I’ve just recently started listening to Robert Kiyosaki’s stuff and it’s pretty simple…

As I see it now… buy a home which could go up or down in value, but if you go broke atleast you have a roof over your head… well security is FALSE, it’s an idea, nothing stops your from being robbed, conned or whatever for that matter.

How about investing the money you wanted to buy a home in stocks instead? Could go up, could go down, yes you do take risks, but they are calculated, and even if you DO LOSE MONEY it DOESNT MATTER! Benefits in terms of cash flow outweigh the risks (when calculated ofc)

Life is an adventure, and when people retire or get complacent, life is OVER!

We’re all smart here, so I’m sure we all know retirement is the biggest killer of old people. (This isn’t limited to age, but we are all programmed to save and retire when we’re old so I’ll stick with this for explanatory purposes)

Robert Kiyosaki is NOT selling security, security is like “God” it’s an illusion, created to keep you safe… it’s human NATURE to do such things… ie FEAR, but from what we understand from life now, both physically and philosophical speaking, life is always changing and you must be FLEXIBLE and ADAPT… hell HUMANS are BUILT to ADAPT.

I’m sure we all know also, that once we stop learning our minds stagnate and die!

Imho anyone who agrees that a house is an asset, is just their early programming and human nature sneaking back in and biting them on the butt!

Yes, you NEED some things in life, ie food, shelter, clothing etc, but whats the difference in renting and buying? You still get shelter if you rent, am I wrong?

Yes it all comes down to pros and cons, but it also comes down to responsibilities, not all of us have families we need to support, but even so if you do have kids… can you really tell me that it’s not better to teach them a skillset and habits, than give them security? Life for them at the age you are now, won’t be the same when they reach your age, ya know.

Sure Kiyosaki’s material may be hung up on technicalities for some but last time I checked the “anyone can make something complicated quote”… means not getting caught up in the IRRELEVANT minor details and bloating the whole thing up!

Taking ACTION and doing the work is all that matters!!

Put it another way I’m from the UK, I say solicitor, Americans say Lawyer… which one of us is wrong? This is ridiculious, they both do the same things, it’s the same job!

The word pedantic was made for a reason!

Sounds like your getting caught up on technicalities and missing the real point. Also sounds like you’ve not come far in understanding what life is about.

Thanks for the well written article made me think about my own beliefs.

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avatar Robert Boyd

The author of this story is WRONG..

Homes are indeed liabilities, its the EQUITY in that home thats an asset.. When you create a balance sheet you record the value of the home as the asset, but this is offset by the mortgage. Its the NET EQUITY which then, and only then because an asset thats sellable.

If the liability is greater than the value of the asset, then there is nothing thats sellable.

Only AFTER the liability is subtracted from the value of the home, do you have an asset, and this is the equity you have.

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avatar Luke Landes ♦127,505 (Platinum)

Sorry, you’re still wrong. A home (or the “value of the home”) is an asset, the mortgage is the liability. Subtract the liability from the asset and you get your net equity. Equity can be positive (good!) or negative (bad!).

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avatar Robert Boyd

Nope, I’m not wrong at all.. A home, just sitting there, comes with it, even without a mortgage, tax liabilities, insurance costs, maintenance costs. If homes were an “asset”, then people could go out and buy a $100,000,000 home, and then proclaim to be rich. The reason of course people cant do this of course is because you need to have the cash to buy one. When you buy a home, you exchange asset A, i.e. cash, for aset B, which isnt the house, you buy the equity in a home.

For example, my last home I bought, I spent $132k and I put $32K down. I exchanged $32K in real cash, for the $32K equity stake in the home. As I pay down the mortgage, the equity builds up, and its this equity, and only this equity thats an asset as the house has expenses with home ownership.

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avatar Luke Landes ♦127,505 (Platinum)

Tax liabilities are liabilities, insurance costs are liabilities, maintenance costs are liabilities… a house is an asset… an asset that comes with liabilities. Finance 101. If you want to expand the definition of “liability” beyond the strict financial sense, the concept of owning a house might be a liability, particularly for someone whose strength is his ability to move from place to place without being tied down, but in a financial sense, a house, like anything else that is or can be owned, is an asset. These are the definitions of “asset” and “liability” in a financial sense, and they’re not up for argument. On a balance sheet, the mortgage on a house is a liability, and the house is an asset.

A stock portfolio brings with it fees (transaction fees, annual fees, etc.), but that doesn’t make the stock portfolio a liability, even if it comes with associated liabilities. The stocks owned in a portfolio are assets. Even if you trade on margin (borrow to buy stocks), the stocks themselves are assets, and the margin account contains the offsetting liability (debt).

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avatar Yana

It’s hard for me to think of negative equity, as the word seems as though it ought to be positive only. The associated costs to home ownership don’t cancel the value of what is actually owned, but living in a home is more expensive than renting because of those associated costs.

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avatar Robert Boyd

I’m sorry Flexo, but you are still wrong.. Here, lets try to dumb it down. Lets for the sake of argument pretend we are discussing an office building.

If an office building is vacant, the value of that building might be, lets say again, $100,000. But if you rent out that property and the profit from that property is $50,000 a year, this bumps up the value of the property to about $500,000 at a cap 10 rate. The value of the property isnt in the real estate, the value of the property is in the LEASE.. Its the LEASE that has value. Now no one puts a lease as a seperate asset line on a balance spreadsheet, but they should. Without those leases, the office building sits there empty, building up liabilities, building up expenses, taxes, repairs, maintenance. The property itself is an EXPENSE, and expenses are NOT an asset..

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avatar Luke Landes ♦127,505 (Platinum)

A building is an asset. Taxes are expenses. A building can RESULT in an expense. A building is not an expense. In fact, it’s the building’s OWNERSHIP that results in an expense. Only assets can be owned, not liabilities, and not expenses. In a world where you can make words mean whatever you want them to mean, a building can be an expense, a liability, an orange, or a quietly. In financial terms, which is what we’re talking about here, a building is nothing but an asset, because that’s where its value (regardless of how it’s calculated) belongs on financial statements, usually under “Fixed assets” or “Long-term assets.” NEVER under liabilities. NEVER under expenses. Expenses are on a completely different financial statement than assets and liabilities, so that’s completely off the table, anyway.

If you own a business, I’d love to get a look at your financial statements.

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avatar Squirrel John

I think some of you are missing the point that Kiyosaki made….in financial term, YES house is an asset but if you keep prophecy in mind because the books say so then you are missing the real world point here.

On the other hand if you swift our thinking and regard it as liability, it will definitely drive us to get rid of the mortgage at the soonest. You will then see how your cash in hand could be better invested and earn profit instead of paying banks the installment for our lifetime..

My 2 cents…don’t mean any disrespect to anyone :)

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avatar eiggam

Hi Mr. Luke,

I am prompted to ask you , Let’s say I recently bought a condo unit that is still ebing built for 5 years so it’s handover to me will still be after 5 years but I am now paying by cash the down payment ((30%) monthly for that 5 years. So by right, I still have not have yet any bank loans .. after the unit is handover to us which will be after 5 years , the remaining 70% balance, I could have either put it in bank financing/mortgage or paid full in cash whatever the case maybe that time .. who know i already have the capacity to pay it in full after 5 years ;) . Now my question is in my financial statement, should I list the house as an asset? and list it in the debt/ liability as well? I have the contract to sell under my name .. Just a bit confusing :) Thanks for your time

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