A home is not a house

By: Efren Ll. Cruz - 3 years ago

Question: During the pandemic, property values in the country have generally turned soft. Should I be worried about the value of our family house? Asked at “Ask a Friend, Ask Efren” free service at www.personalfinance.ph, SMS, Viber, Twitter, LinkedIn, WhatsApp, Instagram and Facebook

Answer: The other morning, I got a very pleasant surprise. You see, I am a novice guitar player and collector. As I was updating the values of my guitars and other equipment, I learned that a guitar that I bought for $280 in 2017 in Japan is now selling in the United States for $2,350! I guess the pandemic created a temporary shortage in stuff.

Now, did I make a good investment? The answer is a flat no. I dreamed of owning my guitars since I was a teenager. And I intend to own and play them (with all the care in the world) until I take my last breath. In fact, I already told my family, as part of my last will, to treat the guitars and equipment as heirlooms.

With our My PF App, the country’s only objective comprehensive financial app, we help clients construct their household financial statements wherein both assets and debts are valued at their current liquidation values. But for long-term assets, we created the subcategories of earning and nonearning.

By definition, long-term assets, which may either be tangible or intangible, benefit the asset owner for longer than a year. For a long-term asset to be classified as earning, its owners need to at least have the intention of making money on such assets. So, even an empty lot can be classified as a long-term earning asset if the intention is to make money on that lot through, say, buy and sell, rentals or build and sell later on. Everything else is classified as nonearning long-term asset.

Homes, just like my guitars, will generally be classified as long-term nonearning assets. There is every intention of keeping them. A home is a place where you raise a family, build relationships, shape young minds, find refuge and solace. A home is forever.

In fact, the law realizes the value of family homes in that it allows such assets to be used as deductions against estates for estate tax purposes. And just like in life, the law recognizes only one family home. As the saying goes, a home is where your heart is. And people only have one heart.

Of course, the foregoing analysis begs the question of how houses will be classified by those who establish their homes but eventually level up because of growing families? Well, their houses will still be treated as their homes and therefore nonearning long-term assets for the time being.

Houses, which are treated more like simple and practical structures, may be classified differently if there is that intention of eventually selling them to make a profit. You see, earning assets like houses are powerful tools in helping households fund the growth of their future cost of living and discretionary spending. That is why at least half of a household’s assets should be classified as earning assets. You don’t fund children’s future education or your own retirement with buying a home. Rather you buy investments like houses on which to earn a profit.

Going back to the value of your family house, consider your long-term personal finance goals to see if any action needs to be taken. A financial planner can help you sort things out.

But if what you have is a family home, there is no need to worry as your home will be invaluable for you. And you will enjoy that home immensely until you climb to the next and final floor of life. INQ

Efren Ll. Cruz is a registered financial planner of RFP Philippines, seasoned investment adviser, bestselling author of personal finance books in the Philippines. Become a Yaman coach. For details, email yaman@personalfinance.ph. To learn more about personal financial planning, attend the 92nd RFP Program this October 2021. To inquire, email info@rfp.ph or text at 0917-6248110