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Distinguishing between Community and Separate Property in Texas divorces

Probably the most important question of any divorce case in Texas, once you get beyond issues related to children, are those that deal with property. Texas is one of a few states in the United States which has enacted laws that treat marital property as community owned. Therefore, Texas is known as a community property state. Whereas most of the country derives its property laws from the English common law, community property states like Texas inherited its property laws from countries like Spain and Mexico. The difference can be significant for you and your spouse- depending on your specific circumstances. 

It would be impossible to go over every element of community property laws in Texas over the course of the next few days. On top of that, it wouldn’t really serve much of a purpose for you as a person who is either going through a divorce or is preparing to go through a divorce. We need to cover the aspects of community property that are most relevant to you as a member of the community here in southeast Texas. Before we do that, let’s discuss the basic differences in community property and common law property states. 

Comparing and contrasting community property and common law property states

In common law states (the vast majority of states in our country), any property that you and your spouse own are usually divided up as belonging to either you or your spouse individually. It is possible to have some joint ownership of property but not in the same way that we will property is owned by the community in states like Texas. Rather, jointly owned property means that you could own 50% of an asset and your spouse could own the remaining 50%. These assets can be divided by a court in a divorce but at no time would you own 100% of an asset unless it is awarded to you in the divorce. 

On the other hand, in Texas property owned by you and your spouse would either be classified as separate or community property. The community property would belong to the community estate and would be subject to division in your divorce. In addition, you or your spouse may own a property interest in the separate property of the other spouse. We will talk more about this later on. 

What about holding legal title to a piece of property? What impact does that have on all this?

One of the common things that a client will tell me in discussing their property rights is that he or she has a piece of property that is titled to him or her. For instance, their home, vehicle or boat has a title attached to it that bears only their name. It must be the case, therefore, that he or she owns that asset to the exclusion of their spouse, right? Let’s see how the state of Texas treats property like this in a divorce. 

As opposed to a common law property state, a community property state like Texas does not treat the title as the final arbiter of who owns a piece of property. Just because the aforementioned boat is titled to your name alone does not mean that the boat is your separate property. Depending on the timing and circumstances of the purchase of that property it may belong to the community estate- even if your spouse’s name is nowhere to be found on the title. 

What are some of the hallmarks of a community property state?

No matter what situation you find yourself in during your Texas divorce, here are some elements of community property law that will be consistent across the board for your case. The significance of the elements that I am about to go over with you is that the personal earnings (from your employment) of both you and your spouse are owned equally by you and your spouse. 

You read that correctly. If your spouse earns $500,000 a year as the president of an oil and gas company, while you are a stay at home mother who does not earn an income, you have a community property right to the income that your spouse earns. That money earned during the course of your marriage is just as much yours as it is his. 

It is presumed that any property owned by you or your spouse during the course of your marriage or at the time of divorce is considered to be community property. Therefore, if you seek to prove that a particular asset that you own is separately owned rather than owned by the community then you must present evidence in a trial that would overcome this presumption. This can often be tricky to do especially if the property in question is old or the circumstances of its purchase acquisition are remote.

Community property basically includes all earnings of you and your spouses during the course of your marriage as well as subsequent income gained as a result of those earnings. So, if you use your earnings from work to purchase a rental home by which you earn a monthly rental check that check’s dollar value is considered to be community property in Texas. What you need to remember from this is that property that is purchased with community property is also community property. 

Separate property is basically all other property that is not community property. I realize that this is not the best definition to give you so let’s talk a little more about it. Separate property is any property that either you or your spouse own prior to the your marriage to one another. Additionally, if you acquire property by gift or inheritance during your marriage it, too, is considered to be the separate property of the spouse who acquires it. 

You cannot own property in a community outside of your marriage. Co-ownership of property with persons who are not your spouse can never be said to be community in nature. You and your spouse own a one half interest in each asset. Again, it does not matter if the asset is titled to you. You can sell that item or otherwise dispose of it during the course of your marriage as if you owned 100% of the asset. Your ownership right is undivided. 

What happens if separate and community property get mixed up together?

If you are in a situation where separate property and community property get mixed up (like in a bank account)- whichever spouse (you or your spouse) is attempting to prove that certain assets are separate and which are community will usually have a difficult time doing so. We usually do not keep up to date records and transaction histories on all of the property that we own. This process of searching through title documents, receipts and other proofs of purchase are typically called “tracing.”

Remember that there is a presumption in states like Texas that all property owned at the time of your divorce is community property. Thus, if you or your spouse need to sort through the barrel of fish hooks that can be community property law, it is up to you to be able to trace the origins of that asset in order to show a judge that it is not community property. If you are not able to prove that it is your separate property, it will be classified as part of the community estate and will be divided up by the judge.

What happens if you invest community property income in a common law state?

If you own property outside of the state of Texas and in a common law property state, you need to be aware of how that situation would be treated in a Texas divorce. Generally speaking, when you invest community property income into an asset that is situated in a common law state, that will not impact the investment’s community property nature. 

Owning real estate in a common law state that is purchased with community property funds means that the law of the state where the property sits will apply. Usually in a situation like this, the non-Texas family court will hold that both you and your spouse have an ownership interest in that property. 

Here is the big question that we need to answer, however: does that real property which was purchased with community property income in another state count as community property or do you own the property jointly with your spouse? The significance may seem small but it is not. Jointly held property means that you do not own the entirety of the asset. You own 50% of that property. Think of it like a jointly held business. You cannot make decisions on a jointly held business without your partner’s input. Community property means that while you and your spouse both own the property, each of you operate as if you own 100%. 

How is income generated from separate property treated in a Texas divorce? 

If you earn rent, interest or dividends from stocks or other investments that are your separate property then that rent, interests or dividends are considered to be community property in Texas. However, this does not have to be true if you and your spouse signed either a martial property agreement or pre-marital property agreement. Within either of those documents you were able to contract for separate property rent or income to remain part of the separate estate. If you are getting a divorce you should share this information with your attorney as soon as you hire him or her. 

How is property basically categorized as either separate or community in a Texas divorce?

In Texas, the presumption for all types of property is that if it exists at the time of your divorce it is presumed to be community property. If an asset doesn’t fit the definition of either community or separate property then it is presumed to be community property. The inception of title rule states that the facts which exist at the time the property was acquired will determine whether or not the property is community or separate in nature. 

Suppose that during your marriage you and your spouse acquired an asset for a single payment that can be traced to both your community estate and the separate estates of both you and your spouse. Thus, your community estate and your separate estates would all effectively own the property in sort of a co-ownership situation. How can you determine what percentage of the property is owned by what estate?

The key to doing this sort of analysis is to be able to prove the source of the money used to purchase the property. Banking and investment accounts are commingled a lot of the time because community and separate property funds are used to invest. If your separate property was utilized to purchase an asset or to invest in community property account, then you may be able to be reimbursed in the divorce for any separate funds that went towards the purchase of the asset or the investment. 

How is life insurance treated in a Texas divorce?

Many of us, when we are first starting out in the world, purchase life insurance policies as protection for our families who rely upon our income for the necessities of life. Sometimes these can be significant assets that can impact a divorce case a great deal. We will discuss tomorrow how these policies are handled in a Texas divorce. 

In the meantime, if you have any questions about the material that we covered today please do not hesitate to contact the Law Office of Bryan Fagan. Our licensed family law attorneys offer free of charge consultations six days a week here in our office. These consultations are great opportunities to ask questions and receive direct feedback about your particular circumstances and life. Thank you for spending part of your day with us today and we hope to have you back tomorrow as we continue to discuss this topic. 

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