Texas along with eight other states has a community property system. During a divorce, the court has the discretion to divvy up the community property estate as it sees fit according to a just and right division. While community property can essentially be assigned freely to either spouse, separate property as a matter of law belongs to one particular spouse provided that it is demonstrated to be separate property.
Separate property is property acquired prior to marriage or during the marriage through an inheritance or gift. Income earned during the marriage through a spouse’s wages or from the income of a separate property asset is community property, meaning that each spouse has a fifty percent interest in that income. Examples of income from separate property include the income or rent money obtained from a separate property rent house during the marriage, interest that accrued on separate property funds in a certificate of deposit (CD) account during the marriage, or the cash dividends obtained from separate property stock during the marriage. Such income from separate property is community property. However, when a separate property asset is liquidated and the funds are used to buy a new asset, the new asset remains separate property. Therefore, liquidation of a separate property asset is not considered income from that separate property asset. The community property system acknowledges the source of the funds and uses that to characterize the property.
Similarly, assets acquired with community property funds or with the funds from the liquidation of a community property asset remain community property. Any increase in value or income from community property is community property.
Notably, the increase in value of a separate property asset remains separate property. Therefore, the community estate does not have a claim to the increase in value of separate property stock or the increase in value of a piece of real estate over time. The simple increase in valuation of a separate property asset does not lead to a community property claim.
However, an unfortunate result of the community property system is that it’s easy for community property funds to infect a separate property asset during the course of a marriage. Such situations include taking the income from a rental property and spending a portion on the rental property by performing maintenance or making improvements. In such a situation, the rental property would remain one spouse’s separate property, but the court could award a reimbursement claim to the other spouse for fifty percent of the community funds expended on the property. This could be an explicit reimbursement claim in the order that is a particular dollar amount or the court could award a larger portion of the community property estate to one spouse based on the value of the claim.