The Characterization of Property in Texas
I have written before that the characterization of property as separate or community dictates who inherits property when a married person dies without a Will in Texas. It also affects which property you can dispose of in a Will at your death.
But how does one distinguish between which property is community and separate? The following is an explanation of how Texas characterizes property.
Characterization of Property
Texas classifies property owned by a spouse as community property or separate property depending on when and how it was acquired.
Property that a spouse acquires before marriage is separate property. Texas presumes that property a spouse acquires while married is community property, except if the spouse received the property by gift or an inheritance.
For example, if you owned a house before your marriage, that home would be your separate property. Or, if you inherited a home from your parents, even during your marriage, that house would also be your separate property.
Property retains the classification as separate or community regardless of whether you convert it to cash or back again. So for example, if you sell a home that was your separate property, the proceeds from the sale will be separate property. That is true even though you sold the property while you were married. Additionally, if you reinvest the proceeds of the sale into another house titled in your name, that house would also be your separate property, even though you purchased it during your marriage.
However, if you want the property to remain separate property, it’s important that you don’t commingle it with community property. Otherwise it may be difficult to “trace” the property in a way that proves that it is separate property.
It is also important that you purchase property in a manner that will not raise a presumption you intended to make a gift to your spouse. For example, suppose you purchase a home during your marriage with your separate property. The house would be your separate property. However, if you include your spouse’s name on the deed, one could argue you intended to make a gift of half the property to your spouse.
Distinguishing Between Community Property and Separate Property
Texas classifies the following as community property:
- Income either spouse earns during the marriage
- Property purchased with income earned during the marriage
- Dividends, interest, and capital gain earned on community property
- Individual contributions to pension, 401K, or other retirement accounts from the date of marriage
- Dividends and interest earned on either spouse’s separate property during the marriage
- Unemployment compensation and payment for lost wages
Texas classifies the following as Separate property:
- Income earned by either spouse before the marriage
- Property owned by either spouse before the marriage
- Capital gain on separate property, such as appreciated stock
- Any property acquired by gift or inheritance
- Retirement contributions made to a spouse’s retirement account before marriage
- Personal injury damages for an physical injury settlement, even during the marriage (except for lost wages which are community property)
So for example, if you owned a condominium before your marriage, and rented the condominium out during your marriage, the rental income would be community property. However, if you sold the condominium during your marriage, the proceeds of the sale would be separate property.
Can Property Be Separate and Community at the Same Time?
It’s possible for property to be characterized as both separate and community. For example, suppose you purchase a home during your marriage for $200,000. Suppose further that the $50,000 down payment you made was your separate property. In that case, 25 percent of your home would be your separate property, while the remainder would be community property.
What happens if one spouse makes a down payment on a house before marriage, but the couple pays off the house during marriage? Is the property then a combination of separate property and community property?
No. Texas characterizes property as separate or community at the “inception of title.” If a down payment is made before marriage, the property is characterized as separate property. The fact that spouses use community funds to improve or payoff separate property may give rise to a claim of reimbursement; however, it does not change the classification of the property.
How does Texas classify property when each spouse contributes an equal share of a down payment before marriage? Since property is classified at the inception of title, each spouse will own a 1/2 interest as their own separate property.
Can Spouses Agree Which Property Is Separate or Community?
Prospective spouses can sign a prenuptial agreement to define what property will be separate or community property during their marriage.
Married couples can enter into postnuptial agreements that defines the character of their property. Marital couples can also agree to change the character of real or personal property from community to separate or vice-versa.
The distinction between separate and community property can get a bit confusing at times; however is very important in determining how property will be distributed at death. Each spouse only has the right to control who receives his or her separate property and their share of community property at death. Marital property agreements can reduce the potential for conflict by clearly establishing what property belongs to which spouse.
This article was originally posted on September 26, 2011 and updated on April 16, 2020.