Often in discussions of retirement planning, the home comes up as a planning item. After all, a home can represent one of the single largest items of value a person owns. But since we live in our homes, must maintain them, and constantly reinvest in them, the question for us non-Silicon Valley homeowners sometimes arises, “Is my home really an asset? It often feels more like an expense, maybe even a liability.” So which is it; is the home an asset or something else? The answer it seems, might determine how we handle this thing. Because if a home is an asset, wouldn’t we want to do everything we can to maximize its value? (Lowe’s and Home Depot sure hope so!) If a home is an expense or a liability, wouldn’t we take steps to minimize its burden on our financial plans? Let’s look a bit closer at these elusive questions.
- a useful or valuable thing, person, or quality.
- property owned by a person or company, regarded as having value and available to meet debts, commitments, or legacies.
If we look at the definition of an asset, thanks to Dictionary.com, we can see that yes, a home is clearly an asset. There’s no disputing this. However….
- the state of being responsible for something, especially by law.
- a person or thing whose presence or behavior is likely to cause embarrassment or put one at a disadvantage.
If we look closer at the definition of a liability, the home takes on a different role. For example, walk away from your home for two years while you travel the world and see what kind of shape it’s in when you return. Not only has it physically deteriorated but if you didn’t pay taxes on the home during that time, it’s likely that you’re in a whole other sort of mess. On top of that, should you decide to purchase a new home, the fact that you own a home already, and must sell it before moving (unless you can own both simultaneously), means the current home is a bit of a disadvantage in your negotiations. In other words, a home is BOTH an asset and a liability!
So why does this matter? Again, if you choose to view the home as an asset, you’re likely to treat it differently than someone who despises the burdens of home ownership and wishes to rid themselves of it (think taxes, lawn care, snow removal, plumbing issues, etc.).
I suspect most people are comfortable with a modified or nuanced view of the home as asset/liability. Perhaps the ‘value’ of a home morphs over time. The home can be both an asset at times and a liability at other times, thus requiring one to plan accordingly for the home depending on where they are in their life.
For example, when you’re 32 and have a huge mortgage on the home and the housing market suddenly drops, it’s wise to have some savings in the bank outside the home in order to avoid being trapped by it (liability). As a person progresses through retirement and wishes to lessen the burdens of home ownership like lawn care and maintenance, consider downsizing the home to a condo, which may free up some of the asset value of the home. Ultimately, owning a paid-for home until death causes it to become an asset to your estate, which means it then becomes either an asset or a liability to those who stand to receive the home upon your passing. Again, whether they view the home as an asset (to sell for profit) or liability (to keep for shelter and maintain) depends largely on their stage in life.
As you guessed it, this debate exists for every possession, whether it’s a home, a car, or ownership in a company that may fall on hard times, although living in the home makes it a bit unique from the others. The key is to know where you are in life, consider how you intend to use the property, and make provisions for how best to manage it. Not being clear is the source of misery for many. For ol’ honest Abe said, “A house divided against itself, cannot stand.” I know he wasn’t referring to your four-bedroom colonial, but it still works well enough for our purposes.
All the best,
Adam Cufr, RICP®