Essential Texas Laws for Divorce and Property Division
In Texas, the end of a marriage involves the division of assets. If you and your spouse reach agreement on how to divide your property, then typically — though not always — an agreed divorce decree, a signed final judgment, will incorporate the agreement. If any portion of the property division is disputed, it is decided by a judge after trial.
When there are no disputes about the assets, the spouses agree on how to divide their property, and sometimes their debts. In that case, the judge must sign the order that divides the property.
Texas law divides property into a category called the community estate and the separate estate. The community estate is generally made up of all of the property acquired by either spouse during the marriage, with a few exceptions. Most property falls into this category. Even if one spouse owned property before the marriage, that property, sometimes called "separate property," can be transformed into community property when it is "co-mingled" with community property. For example, if a spouse owned a house before marriage , sometimes that house can become both spouses’ community property.
Other items of property are "separate property." Separate property is property owned or acquired by a spouse before marriage, during marriage if the person received it as a gift or an inheritance or it was used as a personal injury settlement (note that if the injured spouse received compensation for lost wages, that portion could be community property). Separate property remains owned by the spouse who had it before marriage. However, separate property can be turned into community property if the property is co-mingled with community funds. For example, if the spouse sells his separate property and cash it out, and uses the money to buy a sports car, then that vehicle is a community property vehicle.
There are many nuances and exceptions to the rules above, but owners of community property in Texas generally own half of the community property. When spouses divorce, it is important to determine what qualifies as community property and what qualifies as separate property. Also, it is important to ensure that if separate property has been converted to community property, then the spouse whose separate property was used should get credit for money spent and for depreciation.
Important Steps for Selling a House After Divorce
Once you are divorced and your come to a final agreement on the division of your community property, it is essential that you coordinate with your ex-spouse to sell the home. It is a greater challenge if you are not on amicable terms, and you may have to resort to the courts to help mediate your effort to sell. In Texas, prior to the listing of the house, the divorce decree must be finalized and signed by the court and filed. This must be accomplished before you put the house on the market or sign a contract with a real estate agent. Once the divorce has been obtained, the next step is to come to an agreement with your ex-spouse regarding the listing price of the house for sale. Once you reach an agreement, you should review the existing mortgage and lien information to confirm that the sale of the house will allow the mortgage obligations to be satisfied. Then it is time to hire a real estate agent to list your home. Typically if you do not live in the same house, it is the owner who gets to keep the proceeds from the sale of the home. However, this is a point of negotiation and this may go either way.
Divorce Agreements and Real Estate
A divorce agreement will typically address how a house will be sold after the divorce. When the spouses first separate, the house may not be sold immediately. In this case, the agreement will state when the house should be sold and what can be done with any profits from the sale. For example, perhaps each spouse wants to separately purchase a new home. The divorce agreement might state that the equity in the house be divided between the spouses so that each spouse can buy their own home.
In other cases, the spouses may agree to sell the house immediately. The divorce agreement should specify who will list the home for sale, when the listing price will be set, how long the house will be on the market and what will happen if a buyer isn’t found within that time frame. Since the divorce agreement is a contract, it will be enforceable on the parties for the terms set out in the agreement. Any person who doesn’t comply with the terms of an enforceable divorce agreement may face sanctions by the divorce court for contempt of court.
Tax Consequences of Selling Marital Real Property
If you are divorced, or if the divorce is pending, and are planning to sell your property you need to understand the tax implications of that sale. If you sell the house for a profit after you are divorced, you will have to pay taxes on any gain. What is considered gain? Gain is either the amount of money you make from the sale or the amount of money more than you paid for the house, whichever is less (title to the house still in joint names does not affect the amount of basis). For example, if you bought the house for $100,000 and you sold it for $120,000, your gain would be $20,000. However, if you had made $10,000 worth of improvements to the house, the basis of the house would be $110,000 for a gain of $10,000. If you owned the property jointly with your ex, the gain is divided in half. You will get a credit for $250,000 in gain if you are single, and $500,000 in gain if you are married. If you are now divorced, and you sold the house for more than you paid, you will not be liable for that gain. You probably have the same equity in the community property portion of the house as your ex has . For example, if the house was worth $250,000 but you only owed $200,000, you had $50,000 in equity. Your ex spouse had the balance of the equity. If you have owned the house for less than two years, you and your ex can sell the house and pay no tax as husband and wife. You can pay a little more tax or a higher capital gains rate by selling while still married, but combined you will pay significantly less tax than if each of you sold the house separately. If you are married and sell the house before you divorce, you will probably do the same thing-pay no taxes. Now, if you and your ex are divorced and you sold the house, things get a little more complicated due to the IRS. The IRS considers you and your ex to be new entities for tax purposes. If you each sold part of the house, you each get the full credit for the first $250,000 in gain. If you sold the house at a loss, however, you may not get any tax benefit. If it is more beneficial, you each can take the $250,000 credit for your part when you file your separate returns.
Difficulties That May Arise When Selling a Home
There are a few common issues that arise when selling a home post-divorce that can create problems for both ex-spouses:
1. Disagreements regarding the price
In many cases, one spouse wants to price the house much higher than the other or refuses to sell for financial reasons. The spouses will have to agree on the price and agree to share in any profit or loss at the closing table in order to avoid problems with the sale of the house.
There are many ways that the spouses can agree on the price. They can agree to get a market analysis from a realtor or have the home appraised. This will help the ex-spouses to decide what the market value of the home is and how they should proceed with selling the home. They may either agree to list the house for as much as the home is worth, list it for less to get the house sold quickly, or have the home appraised so there is no argument over the value of the home.
2. Disagreements regarding the timing of the sale
In some cases, one spouse may have moved out and may want to sell the house quickly, while the other spouse may want to stay in the home for a set period of time. While both parties "want" to sell the home, they often have disagreements over what "quickly" means and how soon the house needs to be sold. Again, this disagreement can easily be resolved by providing the date in which the house must be sold, including wording that is as follows: "The property is to be sold by (insert date). If the property has not been sold by that date, the parties agree that the property is to be listed for sale by co-listing agents agreed to by the parties prior to the expiration date. The parties shall split equally the Real Estate Commission earned upon the sale of said property. Any profits or losses will also be divided equally."
3. Refusal to cooperate
In many divorce cases, one spouse fails to understand the impact of the divorce on the home and its finances. This is where having a divorce agreement in place, whether in the form of a Mediation Settlement Agreement, a Temporary Order, a Final Settlement Agreement or a Temporary Restraining Order, is essential. If you and your spouse have a court order in place that outlines who is responsible for selling the home and when the sale must occur, you will have no choice but to comply with the order. If your spouse refuses to cooperate despite the terms of the order or agreement in your Texas divorce, you can request a court hearing to enforce the order. Here, the judge can issue the opposing spouse an order telling him or her to comply with the court order.
Gauging the best time to sell your house and the lowest price is never an easy decision. Avoiding problems with how to split the proceeds and loss of selling the house is much easier with a divorce agreement.
When to Seek Legal Guidance
Legal assistance in the process of selling a property once you reach a divorce agreement is highly recommended. In particular, a divorce-related sale often comes with more challenges than a typical transaction deal with, and having the insight of a professional will ultimately make this process a smoother one for all parties involved.
Professional lawyers who specialize particularly in Texas divorce situations will have a deep knowledge of the applicable laws and regulations that affect not just the sale of the property, but the process in which it is owned and sold as well. For example, there are a wide and unique variety of tax implications associated with divorce-related transactions, including whether the sale or purchase of the new house will be subject to capital gains tax (most likely not, but there are things couples can do to avoid this problem) , and whether the couple or individual has a right to a lower tax bracket. Having a lawyer who specializes in these issues will help ensure you maximize your benefits through the situation.
In addition, a divorce lawyer will be familiar with the types of issues that could cause problems with the changing ownership of the home and what needs to occur in order to avoid them. Your lawyer can provide advice on the for-sale-sign implications, how to handle escrow status, warranties and all of the other little details that usually come up related to the transaction.
If you have a lawyer, your first logical step after a divorce agreement will be to sit down with him or her to discuss all of these issues in detail. It is not a bad idea, however, to get multiple opinions. It’s easy to find yourself in an "echo chamber" when dealing with important legal issues, and having several sets of ears could be helpful in avoiding potential pitfalls.