How do you know if this house is an asset or a liability? Is the house an asset just because it is listed under the asset column?" 174 Rich Dad's Guide to Investing After understanding the concept, rich dad would add the numbers, just so I could understand the concept better. "Let's say all the expenses associated with this house add up to $1,000. That includes, the mortgage payment, real estate taxes, insurance, utilities, and maintenance. And you now have a ten- ant paying you $1,200 a month. You now have a net rental in- come of $200.00 a month, which makes it an asset because this house is now putting money in your pocket, as verified by the $200.00 income. If your expenses stayed the same, and you col- lected only $800.00 a month in rent, you would now be losing $200.00, and even though you had gross rental income of $800.00 a month, the property would become a liability. So even with rental income, the property could still be a liability in- stead of an asset. And then I hear people say, 'But if I sell it for more than I paid for it then it becomes an asset.' Yes, that would be true but only when that event occurs sometime in the fu- ture. And contrary to popular belief, the price of real estate does go down on occasion. So the saying 'Don't count your chickens before they hatch,' is a wise bit of financial wisdom." The Government Changed the Rules Literally billions of dollars were lost on real estate after the 1986 Tax Reform Act. So many speculators lost money be- cause they were willing to buy high-priced real estate and lose money on the assumption that the price of real estate would always go up and the government would give them a tax break for their passive real estate losses. In other words, the government would subsidize the difference between rental income and rental expenses, which were higher. As they say, "Someone changed the rules." After the tax law change, the stock market crashed, savings and loans went broke, and a huge transfer of wealth occurred between 1987 and 1995. Investment property flowed from primarily the S quadrant- the high-income professionals, such as doctors, lawyers, ac- Financial Literacy Made Simple 175 countants, engineers, and architects-to the investors in the I quadrant. That single tax law change forced millions of peo- ple out of investing in real estate and into the paper asset mar- ket known as the stock market. Could another transfer of wealth from one side of the Quadrant to the other be ready to occur soon? This,time, could it be paper assets instead of real estate? Only time will tell, and history does tend to repeat itself. When it does repeat itself, some people will lose, but many others will win. In Australia today, the government still has laws that allow investors to "negatively gear" their investment real estate. In other words, you are encouraged to lose money on your rental real estate, with the idea of gaining a tax break from the gov- ernment.